Forex Margin Calculation

How to Calculate Margin Requirement?

margin calculation

Every time you place a trade, your margin requirement for your position will be blocked. If your trade goes against you then you may get a margin call at a predefined level by your broker. If you do not close your trade position and your account balance reaches the margin call level then your position will be automatically closed and most of your account will be wiped off.

Considering all this and to have a better money management a trader should check the margin requirement for a position before entering a trade.

Now you may be taking a position for a currency pair in which neither the “Base Currency” nor the “Quote Currency” is your “Account Currency” nor hence you will need to see how much is the margin requirement for that trade in your home currency. In fact your broker’s trading platform will show you the margin requirement but let’s still see how the margins are calculated.

Every time you place a trade, your margin requirement for your position will be blocked. If your trade goes against you then you may get a margin call at a predefined level by your broker. If you do not close your trade position and your account balance reaches the margin call level then your position will be automatically closed and most of your account will be wiped off.

Considering all this and to have a better money management a trader should check the margin requirement for a position before entering a trade.

Now you may be taking a position for a currency pair in which neither the “Base Currency” nor the “Quote Currency” is your “Account Currency” nor hence you will need to see how much is the margin requirement for that trade in your home currency. In fact your broker’s trading platform will show you the margin requirement but let’s still see how the margins are calculated.

Margin Calculation

Let’s say that you are trading with GBP/JPY and your account currency is U.S. Dollar. Now suppose you are taking a position for a mini lot i.e. 10,000 units. What it would mean is that you are buying 10,000 British Pound against Japanese Yen. Hence as far as your trade is concerned, you are paying in Japanese yen and buying British Pound but in fact you are first buying Japanese Yen by paying in U.S. Dollars. So your margin requirement will be first determined in U.S. Dollars.

Margin Requirement Formula

The formula for the margin requirement in your account currency is as follows:

Margin Requirement =({BASE Currency} / {Account Currency}) * units) / (leverage)

In our example of trading EUR/JPY the above terms in the formula translates as follows:

Account Currency = USD
BASE Currency = EUR; Quote Currency= JPY
Base Currency / Account Currency = Current Exchange Rate of EUR/USD
Units = 10,000

Now let’s say that the current exchange rate of EUR/USD is 1.2900 hence "Base Currency / Account Currency" = 1.2900

Leverage is also called Margin ratio. Let’s sat the leverage you use for your Forex trading is x30 or 1:30 then the margin requirement = (1.2900*10,000)÷30 = 430 U.S. Dollar.

Now let’s calculate the margin required if the same position is taken by a leverage of 50 then the Margin required = (1.2900*10,000)÷50 = USD 258.

Calculator

 
 
 
 
 

Leverage (Margin Ratio) and Margin Requirement

On the face value you will find the second option as very attractive because if you use a higher leverage of 50, you would be able to take the same position of buying 10,000 Euro against JPY by only 258 dollars which is much less than the 430 dollar in the first example. But we should not forget that leverage works in both direction. If your trade is profitable you earn more but if you get into loss, you lose equally more. With high leverage your margin call will come much later but what you will lose is also much more. Your Forex broker may be offering very high leverages in the countries which do not have strict restrictions about maximum leverages on trading but it is always better to use optimum leves of trading leverages.

You may check pip value calculator to calculate the value of a bip and also position size calculator.
 

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