What Is Margin and How Does It Work?

What Is Margin and How Does It Work?

In the previous lesson, we talked about leverage, which is directly connected to the margin system. Let’s dive right into a practical example to explain how margin works:

Example:

Imagine you open an account with a brokerage firm and deposit $7,000. You are offered a leverage of 100:1. You decide to open a buy position in the market on the USD/JPY currency pair, with a trade size of $100,000.

Margin Required (Used Margin):
Since your leverage is 100:1, only 1% of the trade value is required from your account.
So, the broker will deduct $1,000 from your balance — this is called the used margin.
Broker’s Contribution:
The broker contributes the remaining $99,000, which equals 99% of the trade value.
Available Margin (Free Margin):
After the trade is opened, you still have $6,000 left — this is your free margin, or available margin.

What Happens When the Market Moves in Your Favor?

Let’s say the trade goes in your favor and you gain $400:

Free Margin becomes $6,400
Used Margin remains $1,000
Equity (total account value including open trades) becomes $7,400
Account Balance still shows $7,000 until the trade is closed

Once the trade is closed, the balance updates to reflect the profit:

Final Balance = $7,400

What Happens If the Market Moves Against You?

Suppose the market moves against you and you lose $500:

Free Margin drops to $5,500
Used Margin stays at $1,000
Equity becomes $6,500
Account Balance remains at $7,000 (until the trade is closed)

If the trade is closed, the loss is realized:

Final Balance = $6,500

What If Losses Increase Further?

Let’s say the loss increases to $6,000, which equals your entire free margin:

Free Margin = $0
Used Margin = $1,000
Equity = $1,000

At this point, a Margin Call occurs.

What Is a Margin Call?

A Margin Call happens when your account no longer has enough free margin to support the open trade. The broker will automatically close your trade to prevent further losses, and your remaining balance will only be the used margin, i.e., $1,000.

This example illustrates the risk involved in leveraged trading and how quickly you can lose your capital if the market moves against your position.

Follow us in the next lesson to learn more about the Forex marke