What is margin? Why do traders need to understand it well

Margin ≠ Fees: What Is It Really?

Often beginners confuse margin (margin) as a cost or transaction fee, but that’s not the case. Margin is the “security deposit” you must deposit into your account to open a trading position. It’s like reserving a seat in a queue before you enter.

When you open a new trade, the broker will “lock” a certain amount of money from your account to allow you to control your trading position. For example, if you want to control a $100,000 position with 200:1 leverage (margin 0.5%), you only need to reserve the security deposit $500 ($100,000 × 0.5%). When you close the trade, this amount will be immediately released back into your account.

Formula and How to Calculate Initial Margin

The calculation is straightforward:

Margin = Contract Value × Margin Ratio (%)

For example, if you open a mini lot (worth $10,000) with a margin of 0.5%, you only need to reserve $50 $10,000 × 0.5% = $50(. The rest is borrowed from the broker using leverage.

Maintenance Margin - The Most Important Part

If you think the initial margin is enough, you might fall into the trap of Maintenance Margin (MM) )Maintenance Margin - MM(, which is the “minimum amount” that must be kept in the account to keep your trade open continuously.

Typically, you must maintain an account balance no lower than 50% of the reserved margin. If your account incurs losses and drops below this level, you will receive a “Margin Call.”

Furthermore, if you do not quickly add funds after a Margin Call, the broker has the right to close your position without approval, which could worsen your losses.

How to Calculate Maintenance Margin

Maintenance Margin = Contract Value × MM Ratio )%(

Where: MM Ratio )%( = Margin Ratio × 50%

Real-world example:

• You pay $1,000 as margin for trading
• The required MM level is )$500 $1,000 × 50%(
• If the trade starts losing and the account drops to ), you are in danger
• If the account further decreases to $500 , you need to deposit more $400 to return to the MM level

Summary of Key Points

Margin $100 Margin( = Security deposit to open a position; it is returned when you close the trade.

Maintenance Margin )Maintenance Margin( = Minimum amount to keep the position open; if below this, expect a Margin Call.

Leverage and margin are partners — higher leverage means lower margin, but the risk is also higher. In case of massive losses, Margin Call may come faster than you expect.