Margin

Margin in FX is the collateral deposit required to hold a leveraged position. It is not a loan or a fee; it is a fraction of the notional exposure that the broker holds as insurance against losses. A trader using 50:1 leverage must deposit 2% of the notional value in margin. When losses consume the margin, the broker issues a margin call and liquidates positions.

How margin is calculated

The formula is simple: Required margin = Notional exposure ÷ Leverage ratio

If you buy 1 standard lot of EUR/USD at 1.0850, the notional exposure is 100,000 × 1.0850 = $108,500. With 50:1 leverage, the required margin is $108,500 ÷ 50 = $2,170.

If you buy 10 mini lots, the exposure is $10,850 and the required margin is $10,850 ÷ 50 = $217.

If you have $5,000 in your account, you can open multiple positions up to the point where total required margin equals $5,000. The broker will not let you exceed that without depositing more.

Used margin vs. free margin

Your account balance is divided into two buckets:

Used margin — the total margin tied up in open positions.

Free margin (or “available margin”) — the remainder available to open new positions.

If you have $5,000 in your account, you open a 1-mini-lot position (using $217 of margin), your used margin is $217 and your free margin is $4,783. You can open 22 more similar positions before running out of margin.

As open positions generate losses, the free margin shrinks and used margin stays the same. When free margin falls to zero, you cannot open new positions. When free margin falls below a certain threshold (the “margin maintenance level,” typically 2–5%), the broker issues a margin call.

Margin calls and forced liquidation

When the margin maintenance level is breached, the broker has a few options:

1. Margin call — warning that you must deposit more capital or close positions.
2. Forced liquidation — the broker automatically closes your positions, starting with the largest or most profitable ones.

The purpose is to prevent losses from exceeding your deposit. If your account has $1,000 and you blow through all of it, the broker does not want to carry a $2,000 loss on a client who has no more margin. Liquidation happens fast — in minutes, sometimes seconds — and you have no say in which positions are closed or at what price.

In normal markets, forced liquidation executes at prices near the market quote. In crisis markets — during flash crashes or when a currency is collapsing — there may be no bids at all, and you are liquidated at any price the market offers. This is how a trader can lose more than the amount they deposited.

Margin interest

Some brokers charge interest on used margin. This is rare in modern retail FX — most brokers do not charge interest. However, some legacy brokers and some institutional setups do charge a small rate (e.g., 1–2% per year) on margin used to hold positions. Check your broker’s fee schedule if interest is relevant to your trading.

Likewise, some brokers pay a small interest rate on free margin — the cash sitting in your account not deployed. This is also rare and is usually a vanishingly small rate.

Margin and carry trades

Traders engaged in carry trades — holding a position for days, weeks, or months to earn the interest-rate differential — are very aware of their margin because the cost of holding the position directly reduces the yield. If you earn 3% annualized on a carry trade but the broker charges 1% on margin, your net return is 2%. This makes choosing a low-margin-cost broker crucial for carry traders.

See also