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To understand “margin” let’s refer to the earlier statement “a $100,000 position in forex trading can be controlled by using just $100 of your own money”. This statement obviously refers to a leverage of 100:1.But significantly margin refers to the $1000 deposit you had to invest in order to avail this leverage. In other words, margin is collateral that you have to give your forex broker to conduct your forex trade using leverage. Margin helps secure your trade with your broker.

Earlier we learnt that leverage is expressed in ratios. What about margin? How is it expressed?

Margin is usually indicated as a percentage of the full amount of the position. It could be 1%, 2%, 3%, 5% or even 0.25% and 0.5%. Different brokers have different margin norms. Once you know your broker’s margin requirement you can figure out the maximum plausible leverage that can be availed in your trading account.

Say your broker has stipulated a margin of 5%. Theoretically it means for a $100 position you need $5. So for standard lot of $100,000 you would require (100,000 x 5) divided by 100 =$5000. This means for a $100,000 position the broker would expect you to put a margin of $5000 which translates to a leverage of 20:1 (100,000 divided by 5000). Similarly you can calculate the maximum possible leverage for different margin requirements as for example for 3%, 2% and so on.

As you can see from above calculations, although leverage and margin are interrelated, leverage does not equal margin. Here’s how different margin requirements could translate to maximum possible leverage.

The concept of Margin per se explained above should not be confused with other similar terminology that you could get to see in your trading platform( as for example account margin, used margin, usable margin etc).

To reckon with this possible confusion, let’s try to understand the different variants of this terminology.

Margin required: Corresponds to what we talked of earlier and refers to the concept of margin as expressed in percentage. In simple terms it’s the amount of money you have to deposit with your broker to open a position.

Account margin: This indicates the sum of money in your forex trading account with your broker.

Used margin: When you open a currency position, your broker will lock in a certain amount of money to keep your position alive. Although this money is technically yours, you cannot utilize it furthermore unless and until your broker returns it to your account margin either when you close the position or when margin call occurs.

Usable margin: This indicates the amount of money remaining in your account to open new positions. Call it clear balance if you like!