What is Margin in Forex Trading?
Margin is the amount of capital your broker requires you to set aside as collateral when you open a leveraged position. Think of it as a deposit that gets released when you close the trade.
How It Works
If you want to open a 1-lot EUR/USD position ($100,000) with 1:100 leverage, your required margin is $1,000 (1% of the position value). That $1,000 is locked as collateral while the trade is open. Free margin is whatever's left in your account after accounting for locked margin. It determines whether you can open additional positions and absorb floating losses. A margin call happens when your equity drops below the required margin level. Most brokers issue a warning at around 100% margin level and will begin automatically closing positions (a stop-out) at 50% or lower to prevent negative balances.
Why It Matters
Running low on free margin limits your ability to trade and increases the risk of forced liquidation at unfavorable prices. Keep an eye on your margin level, especially when holding multiple open positions across correlated pairs.
Common Mistake
Ignoring margin level until the warning arrives. By the time a margin call triggers, options are already limited. Monitoring free margin before opening additional positions is how traders avoid forced liquidation at the worst possible price.
Example
Your account has $5,000. You open a 1-lot EUR/USD position requiring $1,000 margin. Your free margin is $4,000. If the trade moves against you by 400 pips ($4,000 loss), your equity drops to $1,000, equal to your margin requirement. This triggers a margin call.
Stoic Insight
Marcus Aurelius: 'The first rule is to keep an untroubled spirit.' A margin call is the market's way of saying the spirit was over-committed. Keeping margin in reserve is keeping composure in reserve.
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