Key takeaways
- Margin is the deposit your broker sets aside to keep a leveraged position open; it is not a fee.
- Required margin = position value in account currency ÷ leverage.
- Free margin is equity minus used margin, and margin level is equity ÷ used margin × 100%.
- If margin level falls too far, the broker may issue a margin call or close positions automatically.
Contents
When you trade forex with leverage, your broker asks you to put aside part of your account to support each position. That amount is called margin. Understanding margin helps you see how much room your account has before losses force positions to close.
What margin is
Margin is a good-faith deposit held by your broker while a leveraged position is open. It is not a fee or a cost. When you close the trade, the margin is released back into your available funds, and your account balance changes only by the profit or loss (and any costs).
Margin is the flip side of leverage, covered in What is leverage?. The higher the leverage, the smaller the margin needed for the same position.
How to calculate required margin
Required margin = position value in account currency ÷ leverage
Position value is the number of units multiplied by the price, converted to your account currency if needed. Equivalently, you can multiply position value by the margin percentage (for example, 3.33% at 30:1).
Example 1: EUR/USD, US dollar account
Assume EUR/USD is quoted at 1.0850 and leverage is 30:1.
| Size | Units | Position value | Required margin |
|---|---|---|---|
| 1.00 lot | 100,000 EUR | $108,500 | $108,500 ÷ 30 = $3,616.67 |
| 0.10 lot | 10,000 EUR | $10,850 | $10,850 ÷ 30 = $361.67 |
| 0.01 lot | 1,000 EUR | $1,085 | $1,085 ÷ 30 = $36.17 |
Example 2: USD/JPY, US dollar account
When the US dollar is the base currency and your account is in dollars, the position value is simply the number of units. One standard lot of USD/JPY is $100,000, so at 30:1 the margin is $100,000 ÷ 30 = $3,333.33, whatever the yen rate.
The Margin Calculator works these out for any pair and account currency.
Balance, equity, used margin and free margin
Your trading platform shows several related numbers:
- Balance: the account value from closed trades only.
- Equity: balance plus or minus the floating profit or loss on open trades.
- Used margin: the total margin locked up by open positions.
- Free margin: equity minus used margin. This is what you have available to open new trades or absorb further losses.
- Margin level: equity ÷ used margin × 100%.
Margin level is the number brokers watch most closely.
Margin calls and stop-outs
Brokers set thresholds for margin level. The exact figures vary by broker and regulator, but typically:
- A margin call level (often around 100%) triggers a warning, and you may be blocked from opening new trades.
- A stop-out or close-out level triggers automatic closing of positions, usually starting with the largest loss. In the EU and UK, retail CFD rules require brokers to close out positions when margin falls to 50% of the required amount.
A stop-out protects the broker and limits further loss, but it locks in the loss at a bad moment. It is far better to manage risk yourself with a stop-loss.
Worked example: watching margin level fall
Assume you deposit $5,000 and buy 1 standard lot of EUR/USD at 1.0850 with 30:1 leverage. Pip value is $10.
At the start:
- Used margin = $3,616.67
- Equity = $5,000
- Free margin = $5,000 − $3,616.67 = $1,383.33
- Margin level = $5,000 ÷ $3,616.67 × 100% = 138.2%
After a 50-pip move against you (EUR/USD at 1.0800):
- Floating loss = 50 × $10 = $500
- Equity = $5,000 − $500 = $4,500
- Free margin = $4,500 − $3,616.67 = $883.33
- Margin level = $4,500 ÷ $3,616.67 × 100% = 124.4%
When would a 50% close-out be reached? Equity would need to fall to 50% of $3,616.67, which is $1,808.33. That is a loss of $5,000 − $1,808.33 = $3,191.67, or about 319 pips. Long before that point, the account would have lost most of its value.
(For simplicity, this example keeps used margin fixed at the opening value. Some brokers recalculate margin as the price changes, so actual figures may differ slightly.)
Common mistakes
- Treating free margin as spare money. It is your buffer against losses.
- Opening many positions until margin runs out. Each one reduces your buffer.
- Relying on the stop-out as a stop-loss. It closes trades after large losses, not before.
- Forgetting that margin rules differ. Check your broker's margin call and stop-out levels.
Summary
Margin is the deposit that keeps a leveraged position open, calculated as position value divided by leverage. Equity, free margin and margin level show how much room your account has. If losses push margin level below your broker's thresholds, positions can be closed automatically. Sizing trades sensibly, as explained in Basic risk management, keeps you far away from those levels.
Glossary terms in this lesson
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Practice worksheet
Practice worksheet
5 exercises to try on paper. Print it, save it as a PDF from the print dialog, or download a plain-text copy.
- Assume GBP/USD is 1.2700. Calculate the required margin for 0.5 lots at 30:1 and at 50:1 leverage.
- Assume USD/JPY is 150.00 and your account is in US dollars. Calculate the margin for 1 standard lot at 30:1.
- A $3,000 account has used margin of $723.33 and a floating loss of $400. Calculate equity, free margin and margin level.
- Explain in your own words why margin is a deposit and not a cost.
- Find out your broker's (or a demo account's) margin call and stop-out levels and write them down.
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