Trading Margin: What Traders Need to Understand to Avoid Losses

Basic Meaning of Margin

When you start trading, your broker will not allow you to use all the funds in your account. Instead, they will hold a portion of your capital as “collateral” to support your trading. This is what we call margin or initial margin.

Importantly, margin is not a cost or trading fee. It is simply money set aside to ensure you have sufficient liquidity to control potential losses. For example, if you want to control a position worth $100,000 and the margin ratio is 1%, the broker will hold $1,000 in your account. This means you are using $1,000 to control a position valued at $100,000.

How to Correctly Calculate Initial Margin

Calculating initial margin is straightforward. The basic formula is:

Initial Margin = Current Account Value × Margin Ratio (%)

For example, if you want to open a position with 200:1 leverage (which equals a margin ratio of 0.5%) and you are trading a mini lot worth $10,000, instead of preparing the full $10,000, you only need to hold collateral of $50 $10,000 × 0.5% = $50(.

When you close this position, the collateral held will be released back into your account, allowing you to use those funds for your next trade.

Maintenance Margin: Managing Your Risk

In addition to initial margin, there is an equally important concept called maintenance margin or free margin.

Maintenance margin is the minimum amount you must keep in your account to keep your trading position open. Usually, the system requires you to maintain equity equal to or higher than 50% of the initial margin you paid.

The formula for calculating maintenance margin is:

Maintenance Margin = Real-time Account Value × Maintenance Margin Ratio )%(

Maintenance Margin Ratio )%( = Margin Ratio )%( × 50%

For example, if you paid an initial margin of $1,200 for a position, your account balance must not fall below ). If your trade starts to incur losses and your account balance drops to $600 , your account will fall below the maintenance margin level.

Margin Call: When the Broker Forces You to Act

When your account falls below the maintenance margin level, the broker will issue a “Margin Call,” meaning you need to add funds to your account to return it to the required level. Usually, if you do not act within the specified time, the broker has the right to close your position immediately without prior notice.

To plan your trading properly, if you pay an initial margin of $1,500 and your trade incurs losses, $400 your account balance will be $1,250, which is below the maintenance margin level $250 . In this case, you will need to deposit at least $750 to bring your account back to normal levels.

The Relationship Between Margin and Leverage

Margin and leverage are closely related. The higher the leverage, the lower the margin requirement. Conversely, leverage allows your profits to expand significantly, but it also increases potential losses. Therefore, risk management is extremely important.

Summary to Remember

• Margin $250 Initial Margin( is the collateral required for you to open a trading position. It is not a cost but funds held temporarily for that purpose.

• Maintenance Margin is the minimum reserve level you must maintain to keep your position open.

• Leverage enables you to control larger positions with less money, but it increases both profits and risks simultaneously.

• When your funds fall below the maintenance margin level, the broker will issue a )Margin Call(, and if you do not add funds, the system may automatically close your position.