Deposit Margin:
The deposit margin, also known as the initial margin or just margin, is the amount of money that a trader needs to deposit with their broker to open a trading position. It is a percentage of the total value of the position and serves as collateral for the trade. The purpose of the deposit margin is to ensure that the trader has sufficient funds to cover potential losses.
Margin Requirement:
The margin requirement is the minimum amount of deposit margin that must be maintained in the trading account to keep a position open. If the account balance falls below the margin requirement, the trader may receive a margin call, requiring them to deposit additional funds to bring the margin back to the required level.
Example:
Let's say you want to trade the EUR/USD currency pair, and you decide to go long (buy) one standard lot, which is equivalent to 100,000 euros. The current exchange rate is 1.1500, meaning 1 euro is equal to 1.15 US dollars.
Calculation:
- Position Size: 100,000 euros
- Exchange Rate: 1.1500
- Value of the Position: 100,000 euros * 1.1500 = $115,000
Now, let's assume the broker requires a 2% margin for this trade:
- Deposit Margin = 2% * $115,000 = $2,300
This means you need to deposit $2,300 in your trading account to open the position. If the margin requirement is 2%, you must maintain at least $2,300 in your account to keep the position open. If your account balance falls below this level, you may receive a margin call.
