Marginal Trading : Leverage is the ratio that provides traders with a high position in the forex market. For the position in the market, traders are required to deposit an initial amount that is referred to as the marginal amount stated in percentage. For example, the U.K major foreign exchange currency pairs have a margin of around 3.3%; thus, the margin is expressed in percentage and gives a start to the trade.
Brokers usually have leverage and margin requirements to aid traders in the investments and have an excellent position to start trading with. The investor pays the percentage of the full value of the trade—an important part of forex trading and leverage.
Margin is a deposit for trade and not a transaction cost for the forex trade.
The broker’s keep the initial deposit of the traders as collateral, and traders get a position to open in the forex market. Traders have exposure to the forex market through the marginal amount. The broker uses the marginal amount provided by the trader to keep the trader’s position open in the market. The locked up amount kept with the broker for an open position is the used margin with the deposit and the used margin increases with new opening of positions. The fund left for opening further positions is the available equity that a trader has secured. The equity is used for the calculation of the marginal level.
Marginal level = (equity/ used margin) x 100
The marginal level is the equity divided by the used margin and the result multiplied by a hundred.
When the marginal level of a trader falls and goes into negative, the trader’s marginal level below 100% in the account of the trader is not able to cover the trading needs of the forex market. Where the trader’s used marginal value has fallen below the equity level, to manage such situations, brokers request the traders to increase their equity; they get a marginal call from the broker regarding the same. Traders are alerted through a notification or an email.
Traders should avoid reaching the marginal call circumstances, and if traders cannot fund the account with the amount, then the open positions of the traders are liquidated. Traders should, therefore, regularly monitor marginal levels using the strategies and manage the account.
Leverage is a significant part of the forex market and margin. Without margin and leverage, a trader won’t start the trade in the forex market. Leverage is the ratio that furnishes traders with a high position in the market with a small initial investment of the trader. Leverages are mostly 1:30 in the forex market and can even go for more up to 1:500.
Different brokers have leverage ratios as per their convenience; therefore, the ratio may vary from broker to broker.
Difference between Margin and Leverage
Leverage and margin are two different terms that are related to each other in the forex trade. We know that leverage gives a high market position to the trader, whereas margin is the percentage of the initial deposit to open a market position. Sharing the same territory, but still, they work differently.
The trader with an initial investment can double their position in the market with the leverage rate. For example, if the fund deposit is 30,000 and leverage of 1:30 is applied, the trader can hold a position of 9,00,000. The margin is 3.3%, then the leverage is 30:1, and if the margin is 10%, the leverage is 10:1. So the two share similarities and dissimilarities at the same time.
The pip is the slightest movement of the foreign currency. Pip stands for percentage in points. However, the small money activity in the forex market sounds less, but with leverage, the pip can generate profits for the traders.
Thus, the small price change is important and originates from a high position in the forex market. However, proper management of the leverage is necessary to enjoy profits of the trade as they have increased risks.
Leverage is used for various assets like stock, cryptocurrencies and indices etc.
Online brokers have the facility of calculating the margin with its margin calculator. Manual efforts of the trader are reduced with this computerised margin calculator. Traders can calculate margin by simply mentioning the currency pair, trade currency, leverage, and trade size units. These are useful for opening new positions in the forex market. Moreover, it helps traders make correct decisions and know about the leverage and trading position in the market.
Other than this, traders can even know the margin and avoid marginal calls from the brokers. The marginal level aids the trader in risk management and technical analysis of the market. The traders can analyse price movements and protect traders from fluctuations.
Importance of Margin Calculation
Margin is not a transaction or any other cost but an amount to trade and open a position in the forex market. Accounts of the traders, therefore, should have a marginal amount to be able to trade. The margin is chosen as per the trading needs of the investors. Thus, a source of trade and takes leverage advantages for the traders. Forex trade is volatile, and traders should never forget that; the amount of margin in the accounts should be limited, and as per requirements, too many funds could lead to loss if an investment fails.
Margin calculation is vital for future positions and knowing how much the traders should spend to trade safely and have profits.
Marginal trading is the process of putting the funds into the trader account to open a position. Margin trading is done to have a cost-free trade with currencies and have a market position. There are margin accounts available for the marginal trading of the investors. These accounts help in increasing the position of the traders and have improved returns.
For trading in the market, investors need to have an account to deposit marginal funds and trade. So, marginal trading is a core part of the whole trading system.
Some terms of Marginal Trading
Margin Requirement – Margin is stated in percentage form by brokers of the market. The percentage is the marginal requirement of the trading account to open a position. The percentage of full position size is also known as the notional value.
Required Margin – Margin expressed in a specific amount of the account currency is termed as required margin. Each amount of the margin account is required to be locked up.
Buying on Margin – It is a situation when a trader buys in the forex market with the borrowed funds. The funds are borrowed from a bank or broker.
Collateral currency – It is the currency that is used as collateral to trade with margin in forex trading.
Free Margin – It is the margin of amount or trade balance that a trader can use to open a new position on margin in the market.
Maintenance Margin – It is the amount of equity required to avoid the marginal call from the brokers.
Used Margin – It is the initial amount that a trader withheld to open a spot position or margin in the market.
Marginal call, marginal level and margin calculators have been discussed already in the article.
Risks of Marginal Trading
The marginal trading definition says that it is a process where traders buy a stock they can afford. The reading process is simple and easy, but it is complex when marginal trading is carried out. With many brokers providing these services, a trader has to choose the correct broker and invest accordingly. Below discussed are the risks that marginal trading involves:
Amplified losses: The marginal trading uses leverage and opens a higher position for the trader. Thus, amplifying the profits and position in the market. However, they also boost the loss with the risks associated with the margin and leverage trading. A higher position leads to higher loss, and the trader binds with the brokers for debt.
Marginal Call: It is another risk that comes with marginal trading. The marginal call asks the trader to add more amount to the margin accounts for the opening position. The brokers ask for marginal calls from the traders. Investors should try and avoid such situations and have a regular check on the account and trade.
Liquidity: The trader faces the problem of marginal calls, and if they cannot refill the account with funds to trade further, the broker can liquidate the open positions or assets if they have any.
Benefits of Marginal Trading
Marginal trading is beneficial as it opens a position in the forex market, and with these, there are many advantages traders can enjoy with marginal trading. Below discussed are profits of marginal trading:
Returns: The returns on the marginal trading account are high. The traders get the opportunity to leverage the security and gain when the price fluctuations are in favour of the trader.
Interest Rates: The brokers of the forex market charge low-interest rates from the traders for their facilities to the traders.
Account Violations: The purchase and sale of securities take 2 to 3 business days to settle the transactions. If there are unsettled funds, then the traders may face problems and have to adhere to 90 days violation restriction. Through a marginal account, traders can avoid such situations.
Flexibility: Trading with a marginal account provides the flexibility of the trade. Traders can take advantage of the forex market opportunities and have higher positions.
Portfolio Diversification: Marginal trading account is a good source of diversification of the risk in the forex market. A trader can hold a strong position in the market and with the margin buying power.
Finance needs: The personal needs of the traders can be met with easy finance and no additional paperwork.
Dividends: Traders get cash dividends on the investments and thus have increased income.
Tax Deductions: The interests on marginal loans are tax-deductible and thus saves investment income from unnecessary paperwork and tax payments.
How to start marginal trading?
For starting a marginal trading forex account, the trader is required to follow simple steps. Below mentioned are the steps that traders should follow:
The first and foremost step is to create an account with a reputed broker. The broker should be licensed and well authorised to carry out such trades online. Next, the trader should go to the brokers’ website and register with the personal information and id proofs. After that, they can create an account.
The second step is to open the account with id and password and search for the assets a trader wants to invest in.
The third step is to choose a position size in the forex market as per the trade rules and instruments.
The last step is buying and selling of the security in the forex market and trade.
In some simple steps, traders can begin investments and enjoy the benefits of trade. If the traders are new to the market, they can use demo accounts. These accounts are tradable without initial investment. Traders instead use virtual money to practise the trade. Traders can set strategies and analyse the market live.
TradeATF is the leading forex broker that offers best trading services and features. It offers maximum leverage of 1:500. You can start your trading with TradeATF
What is Free margin in the forex market?
We have earlier discussed free margin, but this topic will discuss it in detail to better understand. Free margin is the amount available with the trader to open new positions in the trading market. It is easily calculated with subtraction of the used margin from the account equity.
Account equity is the sum of marginal account balance and the unrealised profits and loss. So, we can say that free margin includes unrealised profits and losses. Thus, if in profit, the open position can be used for opening a new position in the forex market with the marginal trading account.
Practises for Marginal Trading
Trading in the forex market is full of risks, and to avoid such affairs, the traders can follow certain guidelines to enjoy marginal trading.
Investing is tricky because the trader needs to research and educate oneself before putting in the hard-earned money. Traders keep in mind that the amount they invest should be a bearable loss. The money loss they can’t afford should not be traded. Never go with the emotions and think practically and logically. Investment should be made if there are funds and they can meet the marginal call risk. These two factors should be known and considered before investing.
Traders should borrow less from any source even if they have access to a large sum of capital. Traders should have a limit to investing in any kind of instrument, and that should be affordable. With practice and knowledge, traders can casually increase their investment and take some risks to get rewards in return.
Borrow for short terms
A margin account holder has to pay an interest charge to the broker. Therefore, the interest should be paid timely and not accumulated over time. As a result, interest would increase and could be a loss for traders in the long run and the short run.
Best Broker for Marginal Trading
Marginal trading in the forex market could be profitable and accessible with brokers. However, brokers are the middlemen of the whole trading process, and if a trader goes wrong with this selection, that trading is a waste of time for such traders.
Traders should go with the best brokers in the market to have profits and enjoy the trade. For marginal trading, I would recommend TradeATF, which is a 4.5 star rated online broker. The broker is well regulated and licensed, with market knowledge for years now. They have been working rigorously to benefit their clients and smooth the trading process.
The broker has an online website with all the facilities of trading platforms and tools for analysis. This makes trade more convenient, and traders can take advantage of the expert advisors, time frames, charts and many more tools. They even educate and have a twenty-four by seven support service for traders’ guidance. A suitable and affordable broker with all benefits for its clients to trade in marginal accounts or any other.
Marginal trading increases the trading position of the traders in the market and is an essential part of forex trading. Investors want to invest less and enjoy a higher position in the market. Margin and leverage both furnish this need of traders with their percentage and ratios, respectively. Although, the higher position comes with lots of risks.
Traders should be careful and follow the tips shared in the article to have more profits and less loss. The affordable investments, market analysis, borrowing limits and planning of investments are the points that would make the trade enjoyable and less of a stress. It even diversifies the trader’s portfolio to have less risk. Emotional control with an understanding of marginal trading is all one needs to be successful in marginal trade.