While getting into trading anything forex or otherwise there will be misconceptions and misunderstanding one what things are and margin happens to be one of those. So you do need to understand margin just as much as you need to understand drawdown. Ultimately if you focus 100% on risk management you won’t honestly worry about either one of these if you keep your risk to 3% or less.
So what is margin? Margin is basically a portion of your account equity that is set aside to make sure you can cover your open trades. It boils down to risk management along with of course your stop loss.
This can be a new concept for traders that is why it is misunderstood a lot of the time. One way to think of it is as collateral for a broker to hold onto while you have open positions on the market. The misconception comes as people tend to think these are fees, but it is just a portion of the account set aside. Once all trades are closed it is back officially in your trading account to use at your disposal.
Trade size is the biggest factor when it comes to your lots size. The bigger the lot size the more margin you are going to need in order to trade. Once your stop loss is in profit you really don’t have as much to worry about.
This is why I trade the New Paradigm with only using a max 10 pip stop loss I can use a bigger lot size and gain the most amount per pip compared to old paradigm traders. I hope that makes sense.
Prime example:
Lets say I am looking to get into a Buy on EURUSD. I get my confirmations set my stop loss to 10 pips.
Link to example chart (I enter most all trades on 1M chart): https://www.tradingview.com/x/DjtgqmZs/
Buy Entry: 1.13523
Stop Loss: 1.13423
For this particular trade I was risking margin for only a minute or two since the trade moved directly into profit then I moved my stop loss to break even at 10 pips which was at about 23 minutes this is actually longer than normal. You can see it peaked then started to consolidate. But that is it emotion free trade it either is or isn’t. This particular entry was based on a Harmonic Wave Convergence and TAB29 Trend Bar Flip.
I usually use two to three different money managements once my trade gets to 10 pips.
- I either close 50% for profit and let it ride on the Hull Moving Average
- Move stop loss to break even also use hull and 40% stop loss
- Close trade at 10 pips entirely take my 2-4% and run
Difference in Lot Size Example For Margin:
So with a 10 pip stop loss and lets just say risking 2% with a $1,000 trading account you would use a 0.20 lot size or $2.00 a pip and in this case we would have made $20.00 bucks total excluding spread/fees to the broker but that is almost $1.00 a minute so not too bad. I would have definitely have closed trade at this point since it went completely sideways.
So this same trade if you used a 50 pip stop loss you would be using a 0.04 lot size or $0.40 cents a pip. So you would have made $8.00 in that same move or almost a 1/3 less. This is just over 10 pips.
With Precision entries like this once it gets to 50 pips you are making 5 times the amount as the old paradigm traders.
What Is Margin Level In Forex Trading?
Margin level is a risk management indicator that helps you predict what margin you have available at any given time to open a new trade. It is a mathematical equation that your broker automatically does.
What Is Free Margin In Forex Trading?
Free margin is what you actually have leftover after the collateral to make trades. They can also be withdrawn if chosen. The quick way to figure this out is just taking Equity – Margin = Free Margin
How Is Margin Calculated in Forex Trading?
Margin is calculated with a mathematical formula shown below:
Margin Level = Equity/Margin X 100%
If you don’t have any open trades at the time your margin level is simply zero.
Other factors that go into the equation are:
- Leverage
- Spreads
- Broker Fees
What is Margin Call in Forex?
This is every traders nightmare. Each broker is different on this so make sure you read the agreement when going live. This is basically when you are over risking in your trading account. I have never had this happen to me as I only trade up to 6% risk at any given time. This will hurt more old paradigm traders then new ones.
So when margin call happens most brokers will close down some of your trades to mitigate the risk but the trades they close you lose that money unfortunately. Holding positions over the weekend can even be a factor with some brokers where they want double the margin to hold. Its case by case and your trading strategy will determine that.
Margin Calculator
Here is a pretty cool calculator you can use to quickly determine margin.
Magin Level Indicator MT4
There are many indicators that will help you figure out margin among other things like drawdown and historical drawdown. It is always a good thing to put together a template when you are first starting out so you can see everything that is going on. You can check out our free indicators and templates by clicking HERE
Conclusion
Don’t get to stuck on margin once you start demoing you will get it more as it is always there moving around as your trade moves positive and negative. Figure out your strategy and go from there. Your margin will factor in when you go live but just to see it in action when you are demoing is a good thing too. If you are new to trading you should never get into this ordeal where margin becomes a factor. That is because the new trading strategies don’t have you over leveraging on your accounts. Just play it safe and have your risk management under control and you will be okay.
