Required Margin:
When you open a new position in the forex market, a specific amount of required margin is set aside. This required margin is the minimum amount of account equity you must have to maintain that particular open position.
The required margin is determined by factors like the leverage used, the size of the position, and the volatility of the currency pair.
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Used Margin:
•Used margin refers to the total amount of account equity that is currently committed to maintaining all of your open positions in the forex market.
•It is the sum of the required margin for each of your open positions.
•The used margin is the “locked up” portion of your account equity that cannot be used to open new positions, as it is already being used to support your current open trades.
Suppose you have a forex trading account with an initial balance of $5,000. You decide to open two positions:
1. Long position on EUR/USD with a lot size of 0.5 lots (50,000 units)
2. Short position on GBP/JPY with a lot size of 0.3 lots (30,000 units)
The margin requirements for these currency pairs are:
– EUR/USD: 2%
– GBP/JPY: 3%
To calculate the required margin for each position:
EUR/USD Long Position:
– Notional value = 0.5 lots × $50,000 = $25,000
– Required margin = $25,000 × 0.02 = $500
GBP/JPY Short Position:
– Notional value = 0.3 lots × $30,000 = $9,000
– Required margin = $9,000 × 0.03 = $270
Now, the total used margin in your trading account is the sum of the required margins for both positions:
Total used margin = $500 + $270 = $770
This means that out of your $5,000 account balance, $770 is currently being used as margin to support the two open positions. The remaining $4,230 ($5,000 – $770) is your available margin, which you can use to open additional positions or maintain the current ones.
The key points to remember are:
– Required margin is the minimum amount of equity needed to open a specific position
– Used margin is the total amount of equity currently committed to maintaining all open positions
– Used margin is the sum of the required margins for each individual position.
Another Example:
Suppose you have a forex trading account with an initial balance of $10,000. You decide to open three positions:
Position 1: Long AUD/USD
– Lot size: 1 lot (100,000 units)
– Margin requirement: 2%
Position 2: Short CHF/JPY
– Lot size: 0.5 lots (50,000 units)
– Margin requirement: 3%
Position 3: Long Gold (XAUUSD)
– Lot size: 0.2 lots (20 ounces)
– Margin requirement: 5%
Calculating Required Margin:
AUD/USD Long Position:
– Notional value = 1 lot × $100,000 = $100,000
– Required margin = $100,000 × 0.02 = $2,000
CHF/JPY Short Position:
– Notional value = 0.5 lots × $50,000 = $25,000
– Required margin = $25,000 × 0.03 = $750
Gold (XAUUSD) Long Position:
– Notional value = 0.2 lots × $1,800 (gold price) = $360
– Required margin = $360 × 0.05 = $18
Calculating Used Margin:
The total used margin in your trading account is the sum of the required margins for all three positions:
Total used margin = $2,000 + $750 + $18 = $2,768
This means that out of your $10,000 account balance, $2,768 is currently being used as margin to support the three open positions. The remaining $7,232 ($10,000 – $2,768) is your available margin, which you can use to open additional positions or maintain the current ones.
