What is Margin Requirement?

When placing a trade you do not need the full position value, rather, a smaller amount of funds often referred to as ‘margin.’ This is simply the amount of collateral or funds required to hold your position. For example, if you buy one contract of the AUD/USD pair which has a notional value of AUD 100,000, you will only need a very small percentage of the value to make the trade.

This concept is often referred to as “leverage” where you use a smaller amount of cash to control a larger valued asset. The margin requirement or leverage rate your forex broker may set will depend on a number of factors – but you will find outside of the US the leverage rate of 100:1 or 1 per cent of your position value is common place.

GO Markets allows leverage of up to 500:1. So this means to buy one contract of the AUD/USD pair you may only need AUD 200 as a margin requirement. Importantly, you will also need to be able to maintain any running losses; therefore, a buffer is prudent to ensure you are not prematurely taken out the market by means of a margin call.

As you can imagine, leverage can work both for and against a trader, so it is important to consider the risks associated before taking the plunge and you can also choose to reduce the amount of leverage your account provides.

If you want to know more about Foreign Exchange, you can sign up here for a free copy of Introduction to Foreign Exchange from GO Markets from which this article has been taken.