Published on: 2025-12-26
Margin is one of the first concepts traders encounter, and one of the most misunderstood. Many beginners think margin is a fee or borrowed money they must repay.
In reality, margin is the cash buffer that allows a trade to stay open.
Every time you place a margin trade, part of your account balance is set aside to support that position. This requirement shapes how large you can trade, how much price movement your account can handle, and when trades may be forced to close.
Understanding margin clearly is essential, because it affects risk on every single trade, whether the market moves slowly or very fast.
Margin, also called leverage, is the amount of money a trader must set aside in their trading account to open and maintain a position. It is not a fee or a cost.
Instead, it acts as a security deposit that allows the trader to control a larger trade than their cash balance alone would normally permit.
When you trade on margin, your broker temporarily allocates additional funds to support the position. As long as the trade remains open, part of your account balance is locked as margin and cannot be used for other trades.
Margin affects:
How large a position you can open
How many trades you can hold at once
How much price movement your account can absorb
Used carefully, margin improves flexibility. Used without control, it increases the chance of fast losses.
Initial margin is the amount required to open a new trade. It is calculated as a percentage of the total position size. This is the first margin traders encounter, and it determines whether a trade can be placed at all.
Used margin is the portion of your account balance that is currently locked to support open positions. While it is in use, it cannot be applied to new trades.
Free margin is the money still available in your account after the used margin is set aside. This is the buffer that absorbs losses and allows you to open additional trades.
Maintenance margin is the minimum amount of equity required to keep a trade open. If your account equity falls below this level due to losses, the account comes under pressure.
This is not a margin type, but a warning threshold. When equity drops close to the maintenance requirement, the broker may alert you or restrict new trades.
The stop-out level is where positions are automatically closed to prevent further losses. This happens when equity falls too low relative to used margin.
In futures and some professional markets, variation margin refers to daily gains or losses that are settled as prices change. Profits are credited and losses are debited regularly.
You have $1,000 in your account. A broker requires a 5% margin for a trade.
Trade size: $10,000
Required margin: $500
The broker locks $500 as margin. The remaining $500 stays free for other trades or to absorb losses. If the trade closes, the $500 margin is released.
You open a trade using a $300 margin. If the market moves against you and losses grow, your available margin shrinks. If losses approach the level of your remaining funds, the broker may issue a margin warning or close positions to prevent further loss.
This shows that margin is closely tied to risk, not just trade size.
Margin is not a fixed number once you enter a trade. It changes in importance as prices move.
When a trade moves in your favor, losses shrink or turn into profit. Your account has more free funds available, and margin pressure eases. You gain more room to hold the position or open another trade.
When a trade moves against you, losses reduce your free balance. Even though the required margin stays the same, your free margin gets smaller. If losses grow too large, your account may no longer have enough funds to support the trade. This is when margin warnings or forced closures can happen.
This is why traders monitor margin levels, not just entry and exit prices. Margin reflects the health of the account in real time. Keeping a buffer of unused funds helps absorb normal price swings and reduces the risk of sudden position closures during fast market moves.
Using smaller position sizes
Keeping extra free margin available
Avoiding overtrading
Monitoring open trades regularly
Margin works best when treated as a risk control tool, not as a way to take oversized bets.
Different assets carry different risk levels, so margin is set higher for markets that move faster or gap more often.
Major currency pairs usually need less margin because they are liquid and trade in large volumes.
Commodities, indices, and volatile assets require more margin due to sharper and less predictable price swings.
Margin requirements can rise during major news or market stress, even if the asset is normally stable.
Higher margin is a safety buffer, designed to protect accounts during sudden price moves.
Traders should always check margin rules before entering a trade, especially around important economic events.
Leverage: The ratio that shows how much larger a position is compared with the margin required to open it.
Free Margin: The portion of your account balance that is not locked in open trades and can absorb losses.
Margin Call: A warning that your account funds are running low relative to open positions.
Account Balance: The total amount of money in your account before open trade profits or losses.
Equity: Your real-time account value, including profits or losses from open trades.
Contract Size: The total value of a trade, which determines how much margin is required.
No. Margin and leverage are linked but not the same. Margin is the money you deposit. Leverage describes how much larger your position is compared to that deposit. For example, 5% margin equals 20:1 leverage. Understanding margin first helps traders control leverage more safely.
Margin itself is not lost. What you can lose is the profit or loss from the trade. If a trade closes at a loss, that loss is taken from your account balance, including funds that were used as margin. If the trade closes with no loss, the margin is returned in full.
A margin call happens when your account balance falls too low to support open trades. This usually occurs after losses. The broker may ask you to add funds or automatically close positions. It is a safety mechanism to limit losses and protect both trader and broker.
Yes. Brokers may increase margin requirements during high volatility, major news events, or market stress. This means you may need more funds to hold the same position. Traders should always check margin rules before trading around major announcements.
It can be. Margin magnifies both gains and losses. Small price moves can have a large effect on account balance. Beginners are often better off using small position sizes and understanding margin impact before increasing trade size.
Margin is the money set aside to support a trade. It allows flexibility, but it also increases responsibility. Traders who understand how margin works, how it changes with price movement, and how it affects risk are far better prepared to trade consistently and avoid sudden account stress.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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