What To Know About Margin in Trading

The concept of margin is very vital in trading as it enables the traders to hold larger positions using a smaller capital. Through margin, traders are able to increase their potential gains at the expense of more risks of losses. The knowledge of what is margin (มาร์จิ้น คืออะไร) is very important in any trader wishing to operate in the financial markets successfully.

Explaining more about margin in trading

What is the margin?

Margin is the sum of money a trader is required to place with their trading broker in order to go out to trade. Basically, it is a loan by the broker which enables the trader to trade a bigger position as compared to when they would have used their money. Margin is usually in percentage of the total position size. As an illustration, a margin of 10 percent implies that you will just have to post up 10 percent of the value of the trade.

• Leveraged: Margin enables traders to leverage, which results in more potential returns.
• Collateral: The margin serves as a security to the borrowing with the help of the broker.
• Risk: It is a high risk strategy with the capability of exaggerating profits and losses through the use of margin.

How to calculate margin

Computation of margin is easy and it has to rely on the position size and margin stipulated by the broker. The margin calculation formula is:

Margin = Position Size × Margin Requirement

As an example, when you are trading a $10,000 value position which has a 10 percent margin requirement, then the margin you would actually be required to deposit would be: $10,000 × 10% = $1,000

That implies you would have to pledge one thousand dollars in order to manage that ten thousand position.

• Position size: The cumulative value of the trade that you desire to open.
• Margin requirement: The percentage, which the broker would want you to deposit.
• Margin calculation: The figure is the amount you should open the position.

How to use margin in trading

An amount of margin is leveraged to capitalize on your capital and to be able to open a bigger position with a smaller amount of money. The following is the way you can use margin in trading:

• Leverage opportunities: You are able to trade a larger amount of specification than your funds would enable you.
• Opening positions:  To open a trade, you need to compute the margin you should deposit and give it to the broker.
• Amplifying profits and losses: Margin trading increases the amount of the potential profit and loss. Such a shift of the price can have a huge increase or decrease.
• Maintaining margin: It is recommended that you should always have a sufficient margin in account to be in position. In case your account drops below the margin requirements a margin call can happen.

Precautions for using margin

The margin might be very helpful, but it is also associated with serious risks. The traders should be sensitive with the use of margin which could cause a lot of losses unless handled effectively. These are some of the issues to be observe:

• Understand leverage: You should know at all times the leverage that you are taking and its effect on your risk as well as possible gain.
• Margin calls: Margin call occurs when the minimum requirement of margin is more than the amount of equity on your account. This can automatically see your jobs closed so as to cover the losses.
• Risk management: Use stop loss orders and pay close attention to your trades to contain risk.
• Only use margin with experience: Margin trading is not the place of beginners. You should make sure that you amass the risks before proceeding with margin.

Summary

The margin may serve well in multiplying the possible gains in trading and is also highly risky. With the appropriate understanding of the way margin works, how to compute margin properly, and use margin safely, traders have the highest probability of success in dealing with risk.