What is margin and why is it important for your trading

Basic Understanding: Margin is Not an Expense

When talking about margin in trading, many people often confuse it with a fee or cost. In reality, margin is the amount of money you need to allocate from your account to be held as collateral by the broker. It is simply a way to “lock” a portion of your funds from your balance to maintain an open trading position. When you close the trade, this collateral is released back into your account immediately.

For example, if you want to control a position worth $100,000, the broker might reserve only $1,000 from your account as initial margin. This means you can trade a $100,000 position using only $1,000 of your own money.

Types of Margin: Initial and Maintenance

Initial Margin - Collateral to open a trade

Initial margin is the minimum amount required by the broker to open a new position. This amount depends on three main factors: the price of the currency pair, the trading volume, and the margin ratio set.

Calculating the initial margin is straightforward:

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

If you choose leverage of 200:1 (which equals a 0.5% margin requirement) and open a mini lot of $10,000, you will only need to allocate a margin of $50 ($10,000 × 0.5% = $50). Or, if you want to control $100,000, you need $1,000 as collateral.

Maintenance Margin - Collateral to maintain the position

Maintenance margin (or called free margin) is the minimum level of funds that must remain in your account to keep your trading position open. Brokers often set this at 50% of the initial margin.

If you pay $1,000 as initial margin, you must keep $500 funds in your account to keep your position safe. As your trade starts to incur losses, the collateral amount may decrease. If it drops below the maintenance margin, the broker will issue a “Margin Call” — asking you to deposit additional funds.

Real-world example: Suppose your trade incurs a loss and your collateral remains $400 while you need to $500 . You will need to deposit more funds $100 to bring the account back to the maintenance margin level.

The Relationship Between Margin and Leverage

Margin and leverage are interconnected concepts. Leverage is the power that margin provides to you. When leverage is high, the margin requirement is low (because the margin ratio decreases), allowing you to control larger positions with less money.

However, this is a double-edged sword — leverage amplifies both your profits and your losses. If the trade moves against your expectations, losses can increase rapidly, and the broker may close your position without notice if your account funds are insufficient to meet the maintenance margin.

Summary and Key Takeaways

• Margin = Collateral needed to open a position, not an expense
• Initial margin is what you pay at the start; maintenance margin is what must be kept at all times
• When your trade incurs losses, margin decreases. If it falls below the maintenance margin, a margin call occurs
• Margin empowers you but must be used carefully, as it also increases risk

Deep understanding of margin will help you better manage risk and trade more conscientiously.