While getting into forex trading, you need a clear idea about the concept of margin and margin calculations. It is crucial in planning and managing your trades. Beginners might be a bit intimidated and overwhelmed by the complex calculation process. Thankfully, there is a simple yet powerful tool called fx margin calculator to help you. But how can you use an Fx margin calculator in trading? Why is it relevant? Keep reading to get some valuable insights.
What is the forex margin?
Margin is simply the amount of trading capital needed to place a trade, and free margin is the balance left in your account after placing trades. While placing trades, you need to maintain the margin level stated by your broker, and an Fx margin calculator can be used to estimate the same. Here More
What is a margin call or margin level?
Margin call is a situation when your trading account balance falls below the minimum margin requirement specified by your broker. In this case, the broker notifies you about the same, and you will have to deposit additional funds to keep the trade running, or the positions will get closed automatically.
Now, margin levels are actually a metric to determine the financial health of a trading account. It is the ratio of your capital against the margin already used for trading, and it is expressed in percentage.
Difference between Stop-Out Level and Stop-Loss Order
The stop-out level is a point at which the trade positions are auto-liquidated (closed) by the broker due to inadequate margin in the account. This is done when the margin-to-equity ratio reaches 50%, and traders describe this scenario as being stopped out.
However, a stop-loss order is different as the trader places it to protect their account against losses when the market starts moving against them, resulting in a losing trade. Stop loss is placed below the entry price in a trade, and the position will be automatically closed when the price touches the set SL.
How can you avoid a margin call?
The best way to avoid a margin call is to calculate the required margin in advance, and the Fx margin calculator will come in handy. Paying attention to risk management and placing an SL in every trade is also important to avoid excess losses that trigger a margin call.
Why are margin calculations relevant?
Margin calculations are relevant because you won’t be able to place a trade unless you meet the margin requirement. The concept of margin is especially important while trading with leverage, as they are interconnected. The amount that you wish to risk for a trade determines your margin requirement. Leverage amplifies the risk, and thus Fx margin calculators consider leverage as a key metric in calculations.
Working of Fx margin calculator
Fx margin calculator works using an algorithm to perform the calculations right away, and the results are always accurate as long as you provide correct data. You have to specify the trading instrument, account base currency, trade size, and leverage availed. The Fx margin calculator will instantly display the required margin in your base currency based on a real-time exchange rate.
What is a maintenance margin?
It is the amount of margin that a trader has to keep in their account. Brokers will specify the margin traders should keep in their accounts to protect themselves against counterparty risk while they are offering leverage.
Rewards and Risks of Margin Trading
Margin trading is done by using leverage to open bigger positions with lesser margins, and the higher profit potential is the primary reward you get with it. It allows you to grow your account while using a lesser amount of funds for trading. The risk of margin trading is you will encounter bigger losses when a trade doesn’t work in your favour. You might also encounter a margin call situation when this happens. Thus, you need sound risk management to secure your capital.
Certainly, margin calculations are an inseparable part of forex trading. Using an Fx margin calculator, you can make quick and informed trading decisions with greater ease.