How to Calculate Margin

The Margin requirement is the amount of money that your Forex broker will require you to put to initiate a trade. Although the margin requirement is based on what leverage you’re trading with, calculating how much money you need to have available to open a Forex trade, you need to know three things:

  1. What leverage are you using?
  2. What is the actual price you executed your trade?
  3. What is the position size you’re going to take?

No matter what leverage you’re using in your trading account, the margin requirement for a one lot trade can vary significantly depending on what pair you’re trading. The margin is also inversely proportional to leverage and can be expressed as a percentage of the full amount of the position.

Margin = 1/Leverage

Example 1: A 50:1 leverage ratio means a margin requirement of 1/50 = 0.002 = 2% margin requirement.

Example 2: A 100:1 leverage ratio means a margin requirement of 1/100= 0.001 = 1% margin requirement.

Let’s assume that you have a new trading account and you have a balance of $5,000.  You decide to trade one lot ($100,000) in EUR/USD. The table below shows you how much margin requirement you need to put up relative to the account leverage:

The issue with relatively small leverage, if you are only trading one lot, is that you need to put up almost half of your account balance as a margin. Locking up this portion of your account balance doesn’t leave you a lot of money to make additional trades, especially if the trade starts going in the wrong direction, and you stand to lose the investment.

The above table highlights the higher the leverage used, the lower the margin requirements that are needed.  The lower margin requirements mean the more money that you have in your account to use for other trades.

Let’s look at a couple of examples to understand the concept of effective margin better.

How to Calculate Margin Example

Before you make any trade, you should always have a rough idea of approximately what the margin requirement is going to be for that trade. As you get more familiar with trading, it will become rather instinctive, and you’ll know how much margin you need to put up.

If you want to calculate the margin requirements that your Forex broker will ask you to put as collateral, you’ll have to use the following formula:

Margin Requirement = (Contract Size * Lot Size * Price) / Leverage

Let’s consider the following example:

  • Buying AUD/USD at market price 0.7800
  • Contract Size = 100,000
  • Lot Size = 3
  • Account Leverage = 1:100

Margin Requirement = (100,000 * 3 * 0.7800) / 1:100=$2340

The outcome is that you need to have at least $2340 in your account as collateral so you can open that position. Otherwise, your order will be rejected because of insufficient margin available.

Let’s now compare the margin requirements needed for two different currencies and see how margin can vary significantly depending on what pair you’re trading:

Example 1:

  • Pair: GBP/AUD
  • Price: 1.6790
  • Trade Size: 100,000 (1 Lot)
  • Leverage: 1:100
  • Margin Requirement = $1306.5

Example 2:

  • Pair: AUD/USD
  • Price: 0.7765
  • Trade Size: 100,000 (1 Lot)
  • Leverage: 1:100
  • Margin Requirement = $776.5

You can see that with the GBP/AUD pair for one traded lot at 1:200 leverage the margin requirements is almost double of what you need for AUSD/USD trade. The difference in the total amount of funds that are being controlled by one lot trade in each of the two pairs.

You can also see the first currency pair is a cross pair that doesn’t involve the US dollar. In this case, and for currency pairs not quoted in USD, we need an additional calculation:

Margin Requirement = [Contract Size * Lot Size * (Base Currency/Account Currency)] / Leverage

The only difference is that instead of using the GBP/AUD exchange rate, we used the Base Currency/Account Currency.  In other words, the base currency from the GBP/AUD pair is the GBP, while the account currency is USD, so we need the price of GBP/USD to calculate our margin requirement for non-US Dollar currencies.

Conclusion

Having a good understanding of margin requirements is essential to your trading because it directly affects the number of trades that you can make, and the size of trades that you should make if you’re going to trade your account in a reasonably safe way.

The smaller your leverage is, the higher your margin requirements will be, and this will mean that you need to put up more money to initiate a position. The same way the bigger your position size is, the more margin your broker will require from you.

Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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