Let me explain my understanding and then please correct me if I am wrong.
Margin is essentially how much of your own capital you have tied up in a position.
If the broker requires 50% margin, then half of the position would be capital, and the other half financed.
Does margin then correspond to the leverage allowed. For example, in this case 1:1
If the margin required was 10% then it would be 1:9
The issue I then have is understanding the required margin while the position is open. Let’s say the margin required is 50% and the maintenance margin is 10%, and I place a trade of £2000, £1000 is my own capital and £1000 is financed. That means I need to have £200 (10%) in the trade at all times? So if the trade moves adversely against me, lets say the position was now worth £1,200 there would be a margin call, which essentially means the position will be closed automatically unless I deposit more funds, or close some of the position?
What if there is already funds in my account? Does this maintenance margin apply to the capital in the position, or the capital in the trading account. This is where I am confused. If it applies to the position, why would I be asked to deposit more funds (this leads me to believe it is applied to the trading account as a whole, but I am unsure). Can some one clarify this for me please?
Margin call is generally initiated by a broker when a trader has capital lower than his demanded minimum maintenance balance. And in many cases, the trader has to make a deposit of his initial position maintained with that broker in his trading account.
There is no financing in retail forex trading. Your broker will not lend you money.
Required margin is a portion of your money which serves as a good-faith deposit, AND it serves as a cushion to protect your account from total wipe-out.
Yes. Required initial margin = 1 / maximum allowable leverage.
If your account provides you with 50:1 maximum allowable leverage, then required initial margin will be 2% of the notional value of your position. 1 / 50 = 0.02 = 2%
No, if required initial margin is 10%, then maximum allowable leverage would be 10:1.
Let’s use more realistic numbers. Let’s say required initial margin is 2%, corresponding to maximum allowable leverage of 50:1. And let’s say that the maintenance margin is 50% of the required initial margin.
In order to enter a trade with a notional value of £2000, you must have £40 of “free margin” in your account. That is, £40 which is not committed to margin in other positions, and is not encumbered by losses in other positions. If you meet this requirement, your order to enter will be accepted.
As soon as your £2000 position is entered, the initial margin requirement is replaced by the maintenance margin requirement – meaning that, in order to hold your position, you must maintain £20 of margin dedicated to this position.
As soon as your position is closed (regardless of profit or loss), the restriction which previously existed on your £20 maintenance margin will be removed, and you will be able to use that £20 for any other purpose you choose.
Required initial margin is a portion of the money in your account. But, it is determined by the notional value of your position. So, in the example above, required initial margin on your £2000 position is £40 (that’s 2%) regardless of the size of your account. If you have £500 in your account, the required initial margin for this trade is £40. If you have £10000 in your account, it’s still just £40.
Maintenance margin works the same way. If maintenance margin is £20, then it’s £20 (for this trade) regardless of the size of your account.