Contract Sizes, Margin & Leverage

Forex Margin

In the forex market, the term margin is most often referring to the amount of money required to open a leveraged position, or a contract in the market. It is calculated in 2 ways: Used Margin and Free Margin. Used margin is the amount of money used to hold open positions. Free margin is the amount of funds available to place additional positions.

The default leverage level is 50:1 for all new accounts.

Understanding and Calculating a Margin Call

A margin call warning (and potential liquidation) is triggered if a customer's account equity falls below the required margin. In other words, to protect both the customer and the company, safeguards have been put in place to prevent a trader from going into the negative and owing the company additional funds. During the margin call warning period, customers are called upon to send additional funds or their position(s) will be closed at market price when a customer's account equity reached the margin call liquidation level. Traders will be subject to margin call liquidation at 100% margin level.

The margin level is calculated as: Equity ÷ Margin * 100 = Margin %

For example, a trader with $2,000 in equity, using $1000 in margin, could calculate margin level as such: 2,000 ÷ 1000 * 100 = 200%.

At 125% margin level (using the previous example, when equity is $1000 and margin is $1250) a trader is essentially using their entire available margin, and is unable to place new trades. When this level drops to 125% a warning indication can be seen in the traders platform in the form of their balance bar turning red. Should the trader not deposit additional funds or free up additional margin, when the account reaches 100% margin level trades will automatically be closed.

Understanding Contract Sizes

Understanding contract sizes, otherwise known as lots, is a necessary foundation when understanding the need for high leverage in the forex market. Each standard lot traded in the forex market is a 100,000 unit (of the base currency) contract. In other words, when trading one lot in a standard account on the USD/CAD for example, a trader is essentially placing a $100,000 trade in the market.

Without leverage, most investors would not be able to afford such a transaction. Leverage of 50:1 would allow a trader to place the same one lot ($100,000) USD/CAD trade with the post of $2,000 in margin.

$100,000 divided by 50 equals $2,000, thus 50:1 leverage means that $2,000 of margin is able to control a $100,000 position.

*An increase in leverage increases risk.

Many retail Forex traders today begin their trading in a mini account. Because standard contracts in the Forex market are rather large, even with 50:1 leverage, $2,000 of margin per contract traded is still pricey for some investors. For this reason most retail brokers offer the option of a mini account.

What is a Mini Account?

Mini accounts are essentially 10% the value of standard accounts, meaning that mini contracts are a 10,000 unit contract. A trade of one USD/CAD mini lot, for example, would be a $10,000 trade, whereas a standard lot is a $100,000 trade.