One of the main reasons why an online forex trading business can be profitable is because of forex margin. Forex Margin allows you to earn money from foreign exchange trading whether you trade by yourself or use an automated forex trading robot to trade on your behalf. In fact, forex margin is the amount of money required by a forex broker from a trader to open a trade or position in the foreign exchange market. This concept of margin has stemmed from stock trading, and is today helping small retail traders around the world to participate in forex.

Trading on margin is nothing but taking a short term loan from your forex broker. Before you can start trading on margin you’ll have to set up a forex trading account with a forex broker, and deposit money in this account. Generally, for margin trading of 1% the broker will ask you to deposit only $1,000 in your account.

Basically, you are providing just 1% of your trading capital, the remaining 99% is provided by your forex broker.Indeed there are even forex brokers who require only 0.5% of margin which means that with $500 you can buy up to $100,000 worth of currencies, or technically speaking you can leverage your account by 200 times !

You also have the opportunity to trade on margin in the stock and futures market,but you get much more leverage in the foreign exchange market because of the special nature of currencies. What is also great is that no interest is paid on the borrowed capital, but only an amount paid for the roll over positions-if open positions are not closed before the delivery date they are carried forward, and the broker will then charge an interest.

You must calculate the margin required as a percentage of the lot value.If your account is denominated in USD the margin required per transaction is calculated in USD. For example, retail forex brokers always quote currency pair such as EUR/USD (i.e. EUR in terms of USD). If the EUR/USD is trading at 1.2500, that is one Euro is worth 1.2500 US Dollars, and you want to buy 10,000 Euros or 10K, you would sell 12,500 USD to get those 10,000 Euros. Basically your margin required will be 1% of $12,500 which equals $125.00.

Let us take a look at the following example:

You have 2 trading accounts with two different forex brokers, Broker A has 2% margin requirement and Broker B has 1%. We consider the above example of the EUR/USD trading at 1.2500.  You have a capital of $10,000 in your trading account, and trade fixed 10K lots. We also assume that you want to put $500 as margin with each broker.

With Broker A the margin required is 2 % and so you will need to put (2% x $12,500)  $250 for every 10K lot of EUR/USD you buy. Thus you will buy 2 lots of EUR/USD at 1.2500 because you are willing to put $500 ($250 x 2) as margin on that trade.

With Broker B the margin required is 1 % and so you will need to put only (1% x $12,500) $125 for every 10K lot of EUR/USD you buy. Thus you will buy 4 lots of EUR/USD at 1.2500 because you are also willing to put $500 as margin on that trade.

Now let’s say that the trade is a bad one, and the EUR/USD moves 50 pips in the wrong direction. Given that with a 10K lot in a mini account one pip is worth $1, with broker A you lose $100 ($1 x 50 pips x 2 lots) , but with broker B you lose $200 ($1 x 50 pips x 4 lots).

So with broker A you have to put more money as margin, and so you buy only 2 lots. However, with broker B you have to put a relatively smaller amount as margin ($125 instead of $250), and in this case you buy 4 lots.The main point that you should understand here is that though Broker A requires you to put more money as margin you are in fact facing less risk than with Broker B.

The fact that you have used more leverage with broker B means that your account balance falls by a higher amount ($200 instead of $100).With Broker A you have leveraged your margin by 50 times that is you have put $250 as margin to buy $12,500 or 10,000 Euros. However, with broker B you have leveraged your margin by 100 times because you have put only $125 as margin to buy $12,500 or 10,000 Euros. Alternatively, you can look at it in terms of real leverage to see that with  your initial capital of $10,000 you have bought $50,000 worth of currencies with broker B, whereas with broker A you have bought only $25,000 worth of currencies. This means that your real leverage is 5 times your trading capital with broker B but only 2.5 times with broker A. Read more about forex leverage.

And leverage is a double-edged sword! Imagine the profits you would have made if the Euro had instead moved 50 pips in your favor. You would have reaped $100 with broker A but $200 with broker B. So leverage can work for you as well as against you. In fact, a large majority of retail traders lose in the forex market because they don’t understand forex margin and leverage. So if you want to tilt the odds in your favor, and become a successful forex trader, make sure you thoroughly understand how these concepts work.

FOREX MARGIN LIVE ON MT4

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