Uncategorised Margin is a critical concept in trading that refers to the amount of capital a trader has available in their account. Understanding margin is crucial because it determines the extent of your trading capability and influences the possibility of receiving a margin call from your broker.
When you are “buying on margin,” you are essentially using borrowed funds from your broker to enter a trade. This requires opening a margin account, which is distinct from a standard trading account.
If your account’s margin drops below a specific threshold, your broker may issue a margin call.
What is Margin Trading?
Margin trading allows you to use a portion of your own funds while borrowing the remaining amount from your broker, enabling you to trade various assets with greater leverage.
How Does Margin Trading Work?
Trading on margin involves borrowing money from your broker to open a position larger than what your capital alone would allow. Unlike a regular cash account, which does not support margin trading, a specific margin account is necessary to access this feature.
To open a trade on a margin account, you must meet an “initial margin” requirement — a minimum balance you must maintain to open a new position. This rate differs depending on the financial instruments you wish to trade, so always consult the product specification for the specific margin rate.
Once you place a trade on margin, the loan from your broker remains open for as long as the position is active, provided you meet all obligations, such as paying interest on the borrowed funds, we only charge this on our FX pairs, while the oil contracts have no additional charges other than the spread. When the trade is closed, the borrowed amount is returned to the broker.
What is a Margin Call?
A margin call is an alert that every trader hopes to avoid. We will endeavour to send an email warning that your account’s margin has fallen below the required level.
A margin call occurs when the account’s value (on MT5 you must monitor your margin level) drops below the minimum threshold of 99% and then again 75% as a warning to you. At this point, we will require that you either deposit additional funds or close out positions to restore the account to the minimum maintenance margin level.
What is Margin Level?
Margin level indicates the amount of margin available to open new positions and is expressed as a percentage. It is calculated using the ratio of equity to the used margin:
- Margin Level = (Equity / Used Margin) * 100
You will receive an email notification letting you know you have fallen into a margin call, when you equity falls under 100% of your used margin.
Email will be sent at 99% – a secondary email will also be sent at 75%.
What Happens If You Can’t Meet a Margin Call?
Failing to meet a margin call triggers a “stop-out level,” where we will begin closing out your open positions to bring the account back up to the minimum margin level. This is done automatically, without your consent, to prevent further losses. During this process, you will be responsible for any losses incurred.
The level at which your positions will be closed is when your equity / used margin falls below 50%.
Your positions will be closed on the basis of your biggest loser first, followed by your second biggest loser and so on until your margin / used equity is back above 50%.
This situation represents a worst-case scenario. Regardless of your experience level, you can protect yourself by employing risk management strategies, such as setting stop-loss orders, to safeguard against market volatility. Additionally, ensuring you have sufficient funds in your account and avoiding trades that are too large relative to your account balance are prudent practices.
What Are the Risks Involved in Margin Trading?
Margin trading carries significant risks, which must be understood before engaging in it. Some of the key risks associated with buying on margin include:
- Margin Calls: You may be required to deposit additional funds if your account falls below the minimum maintenance margin.
- Amplified Losses: While margin can magnify gains, it can also lead to significantly larger losses.
- Liquidation: Your positions could be automatically closed out if you cannot meet margin requirements.
Tiered Margining: What does this mean and how will this affect me?
At Onyx Markets, we offer a tiered margin system designed to accommodate different trading volumes. This means that smaller positions operate with lower margin requirements, while larger positions have incrementally higher margins.
For detailed and up-to-date information on our margin requirements and tiered system, please refer to our Margin document or give us a call on 0203 097 5000.
Conclusion
When used appropriately and as part of a broader risk management strategy, margin trading can be a powerful tool to optimize your trading capital and seize multiple trading opportunities. However, it’s essential to remember that both margin trading and leverage can amplify profits and losses, so use them with caution and responsibility.
