What Is Margin in Forex Trading?

Margin is the amount of money your broker reserves to keep a leveraged trade open. It is not a fee or a trading cost, and the money is not automatically lost when the position is closed.

Instead, margin acts as a form of collateral. It represents the minimum amount of capital that must remain available to support an open position.

Margin is closely connected to leverage. Leverage allows traders to control positions larger than the capital they commit, while margin is the portion of capital required to maintain those positions.

Key Takeaways

• Margin is the amount of capital reserved to support a leveraged position.
• Margin is not a fee and is generally released when the position is closed.
• Leverage and margin describe the same relationship in different ways.
• Used margin is the amount currently reserved for open positions.
• Free margin is the equity still available to support existing positions or open new ones.
• Falling equity can lead to a margin close-out if the account no longer meets the broker’s requirements.
• Position sizing and risk management are essential when trading on margin.

Margin Requirements

Sometimes, instead of leverage, you’ll see a broker with margin requirements. These are essentially the same thing, just represented in different ways. For instance, a 10% margin requirement lets you open positions by only setting 10% aside as margin. Effectively, this is identical to 1:10 leverage.

How does margin work?

Let’s say you want to open a EUR/USD trade sized at 1 micro lot, which equals 1,000 units of the base currency. If your account is denominated in euros and you are trading EUR/USD, that position represents €1,000 of exposure.

Without leverage, you would need the full €1,000 to open the position. With 1:10 leverage, the broker only needs to reserve €100 as margin.

The calculation is:
Position value ÷ leverage = required margin 
So, in this case:
€1,000 ÷ 10 = €100

Used Margin, Free Margin and Equity

The next key aspect to understanding margin are the concepts of used margin and free margin.

When you open a trade, part of your account becomes used margin. This is the amount currently reserved for open positions.

The funds you can use to open more trades free margin. However, free margin isn’t simply your account balance when used margin is subtracted; it is also affected by the changes in the positions you have open.

When you open a position, your used margin for that position is set, and it doesn’t change. What does change is your equity.

Equity is your account balance plus or minus the floating profit or loss from your open trades. If your trade moves in your favor, your equity increases. If it moves against you, your equity decreases.

The basic formula is:
Free margin = Equity – Used margin

Free Margin and Equity in Practice

For an example, let’s say you deposit €1,000 and open a trade that requires €100 margin.

At entry:

• Balance: €1,000
• Floating P/L: €0
• Equity: €1,000
• Used margin: €100
• Free margin: €900

If the trade moves in your favor by €40:

• Balance: €1,000
• Floating P/L: +€40
• Equity: €1,040
• Used margin: €100
• Free margin: €940

What Happens if Equity Runs Low?

If the market moves against your open positions, your equity decreases. If it falls too far compared to the margin required for your trades, your broker may close one or more positions automatically.

For EU retail clients trading CFDs, ESMA rules require providers to close positions when account equity falls to 50% of the total initial margin required across open CFD positions. This is known as the margin close-out rule.

For newer traders, it’s also crucial to select a broker with negative balance protection. This means your losses are limited to the funds in your trading account, so you cannot lose more than you deposited or end up owing money to the broker.

You shouldn’t treat a margin close-out as a normal risk-management tool. If the platform is forced to close trades for you, the account has already reached a dangerous point. To be a consistent trader, you must plan your trade size, place stop losses, and be aware of your total exposure before entering.

Conclusion

Margin is a core part of leveraged forex trading. It lets traders control larger positions with less upfront capital, but it also makes risk management much more important.

Understanding used margin, free margin, equity, and margin close-out helps traders see how much room their account really has before a position becomes dangerous.

The key takeaway is simple: margin can make trading more flexible, but it should never be used carelessly. New traders should always calculate their risk before entering, use sensible position sizes, and treat margin close-out as something to avoid, not something to rely on.