Margin in forex trading
Did you know that you could speculate on forex markets with just a small deposit? This is called margin trading, and it could make your capital go further. Learn more about margin in trading and find out how to get started.
What is margin in trading?
Margin in trading is the deposit required to open and maintain a position. When trading on margin, you will get full market exposure by putting up just a fraction of a trade’s full value. The amount of margin required will usually be given as a percentage.
There are two types of margin to consider when you’re trading: initial margin and maintenance margin. The initial margin is the deposit required to open the position, often called the deposit margin or just the deposit. Maintenance margin is the money that must be available in your account to fund the present value of the position and cover any running losses.
How does trading on margin work?
Trading on margin works by enabling you to open a position while only committing a fraction of the total cost upfront. The margin is determined by your trading provider’s margin system, and the amount of capital required will depend on the asset being traded. Those with higher volatility or larger positions may require a bigger deposit.
Margin requirements reflect your leverage. For example, if the margin requirement is 5%, the leverage is 20:1, and if the margin requirement is 10%, the leverage is 10:1.
Once you have opened your position, you might need to add more money if your trade starts to incur a loss and your initial margin is no longer enough to keep the position open. If this happens, your provider will place you on margin call, and you’ll be required to top up the funds in your account – this is the additional capital known as maintenance margin.
Example of buying on margin
Let’s say EUR/USD is trading at $1.1128, with a buy price of 1.11284 and a sell price of 1.11276. You think that the euro is set to gain value against the dollar, so you decide to buy a single lot (equivalent to 100,000 units of the base currency) to the value of €100,000 ($111,248). However, you don’t want to put down the full amount of the trade. By deciding to trade on margin, you’d only need a fraction of this cost up front to get exposure to the full value of the trade.
With IG, EUR/USD has a margin factor of 2%, so you only have to commit €2000 ($2224.96) as margin. In this example, your leverage would be 50:1.
Pros and cons of margin in trading
Pros of margin in trading
Margin can magnify your profits, as any gains on your position are calculated from the full exposure of the trade, not just the margin you put up as deposit. Buying on margin means that you have the potential to spread your capital even further, as you can diversify your positions over a wider array of markets.
Cons of margin in trading
Although margin can magnify profits, it can also amplify losses if the market moves against you. This is because your loss is calculated from the full value of the position, not your deposit, and it is possible to lose more than your initial deposit on a trade. However, there are steps that can be taken to mitigate the negative side of margin, such as implementing a risk management strategy.
What to bear in mind before trading on margin
- Trading on margin means you only have to put down a deposit to open a position
- The amount of margin you are required to put down depends on the asset being traded, as well as the amount of total capital you have available in your account
- Because margin increases your exposure, you have more buying power, but this could magnify both your profits and your losses
- If your margin deposit has fallen below the minimum requirement, your trading broker may notify you and you will have to fund your account immediately
- If you don’t fund your account with a maintenance margin, your positions will be closed, and you will be responsible for the loss
- Always make sure you understand the margin requirements before entering a trade
What margin rates are offered by IG?
IG offers tiered margin rates, which means we apply different margin requirements at different levels of exposure. Our margin rates start from 2% – you can see each market’s charges and costs in our platform.
Here, you’ll see an example of margin rates when trading popular forex pairs with IG.
How to start trading on margin
To start trading on margin, follow these steps:
- Create an IG trading account or log in to your existing account
- Search the asset you want to trade and select it
- Choose your position size
- Click on ‘buy’ or ‘sell’ in the deal ticket and confirm the trade
Note: When you select your position size, your margin will automatically populate at the bottom of the deal ticket.
This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.