Margin simply “freezes” a small portion of your account for the duration of the trade in question.
Let’s use round numbers, because they’re easier.
Say your account has exactly €100,000 in it, and you have no open positions. In this case, none of your account is committed to margin.
Now, suppose you open a one-lot position in EUR/USD. That position is worth €100,000 (its worth is properly referred to as its notional value). Take note: you have not “bought” or “sold” anything – and you never “buy” or “sell” anything when you deal with a retail forex broker, although we use those terms for convenience. What you have done is place a bet with your broker on the direction that the EUR/USD price will move.
If you have opened a LONG position (what we loosely call “buying”), then you have automatically placed your broker in a SHORT position, because he has the opposite side of your trade. In proper forex terminology, your broker is your counter-party (and he will remain your counter-party, until you close this trade). This subjects your broker to exposure in the real market, which he can manage in various ways (for example, offsetting your LONG position against some other trader’s one-lot SHORT position).
But, your broker does not want any exposure to the possibility that you might blow your entire account, or MORE than your entire account. So, he requires a security deposit, an escrow amount – a margin amount – which remains in your account, but cannot be touched by you, until your position is closed. In other words, you can’t lose this margin amount in a bad trade, you can’t withdraw it or transfer it to another account, and you can’t use it as margin to open any additional positions. It’s frozen. It protects your account from total wipe-out. And it protects your broker from the risk that you might blow more than your account balance, and end up owing him money.
In the example above, one lot (100,000 units) of EUR/USD requires a margin amount equal to 2% of the notional value (€100,000) of your trade. That is, the initial margin required is €2,000. If you have €2,000 in “free margin” in your account, then you are permitted to open this trade.
As soon as your trade is entered, maintenance margin (the margin required to stay in this trade) replaces the initial margin. With most brokers, including Oanda, this maintenance margin is 50% of the initial margin. So, as soon as your EUR/USD trade is entered, maintenance margin becomes €1,000, and that’s the amount that is “frozen”. You can lose or withdraw the rest of the account, but you can’t touch that last €1,000, until you have closed your EUR/USD trade.
Sorry for the long-winded answer. I hope it clears things up for you.
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