Margin is the required amount of funds needed to open a trade. It acts as collateral to maintain an open position and is calculated based on lot size, contract size, leverage, and exchange rate. Understanding how margin is calculated is essential for managing trading risks effectively.
Margin Calculation Formula
For Forex pairs, if the Quote Currency is USD, the margin formula is:
Margin = (Lot * Contract Size / Leverage) / Exchange Rate
- The exchange rate is used to convert the Base Currency into the Account Currency.
- If the Base Currency or Quote Currency is not USD, additional conversion to USD is required.
Example 1: Margin Calculation for GBPUSD (Quote Currency is USD)
- Trade Type: SELL 0.1 GBPUSD
- Leverage: 1:200
- Contract Size: 100,000
- Exchange Rate: 0.92
Calculation
- Using the Margin Formula:
(0.1 * 100,000) / 200 = 50 GBP - Convert GBP to USD:
50 GBP / 0.92 = $54.34
Thus, the required margin is $54.34.
Example 2: Margin Calculation for USDJPY (Base Currency is USD)
- Trade Type: SELL 0.1 USDJPY
- Exchange Rate: 133.587
- Leverage: 1:200
- Contract Size: 100,000
Calculation
- Using the Margin Formula:
(0.1 * 100,000) / 200 = $50
Since the Base Currency is already in USD, no further conversion is needed.
Thus, the required margin is $50.
Example 3: Margin Calculation for GBPJPY (Neither Base nor Quote Currency is USD)
- Trade Type: SELL 0.1 GBPJPY
- Exchange Rate: 167.275
- Leverage: 1:200
- Contract Size: 100,000
Calculation
- Using the Margin Formula:
(0.1 * 100,000) / 200 = 50 GBP - Convert GBP to USD:
50 GBP / 0.92 = $54.34
Thus, the required margin is $54.34.
Margin Calculation for Crude Oil, Indices, and Shares
For commodities like Crude Oil, Stock Indices, and Shares, margin calculation is slightly different:
Margin = (Open Price * Lot * Contract Size) / Leverage
- The leverage for these assets is determined by the liquidity providers and may vary.
- Unlike Forex, where margin depends on lot size and exchange rate, commodity and stock index margins are calculated based on the asset’s price at the time of trade.
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