What is forex margin?

Q: What is forex margin?

Explain with a numerical example.

A: Best Answer:  Forex Margin is the amount of money required by a forex broker from a forex trader to open a trade or position in the foreign exchange market. 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 $1000 in your account. Basically, you are providing just 1% of your trading capital, the remaining 99% is provided by your forex broker. You now have the possibility to buy up to $ 100,000 worth of currencies with only $ 1,000 or put technically you have leveraged your account by 100 times.

Numerical Example:

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 10 K, 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.

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