Beginner’s Guide to Use Margin Calculator
Table of Content
- 1 Required Margin in Trading
- 2 Important terms of margin calculator
- 3 An example of margin
- 4 Use of Margin Calculator?
- 5 Understand Margin Criteria In Trading
- 6 How Much margin should you use while trading?
- 7 When To Avoid Using This Calculator In Trading?
- 8 Take profit from the market using a margin calculator
Forex trading is extensive and to perform well in this field, a trader needs a set of tools. There are many different tools and calculators available in the market. And in this article, we will have a look at the margin calculator.
Required Margin in Trading
Before getting into the exact tool, let’s know about what a margin in trading is. A margin in forex is the difference between the liquid fund and a broker will give to that trader.
In simple terms, it’s the liquidity amount lent to the investor by the trader or the broker. In this situation, the margin calculator helps in calculating that amount. If you are new to forex trading and want to start as a pro, we are here to help.
Important terms of margin calculator
If you are wondering about where to get a trading calculator, we have got you covered. Search it by the name and you will find a lot of free tools for calculating margin.
The simple work of this tool is to let the broker and investor know the part of the money which is in the form of a loan.
If you are not aware of the basic formula of margin, we will explain it to you with an easy breakout. In this tool, there are three main terms or parts. The parts are — trade size, the leverage you are taking, and the current currency exchange rate.
Trade size will depend on what kind of lot you are choosing which includes a micro, standard, and more. Second, while calculating the margin, you need to know the leverage you are considering while calculating. The leverage can anywhere go from 1 to 500 or even more as it depends on the broker you are trading with.
Leverage gives you the ability to trade with greater volume even when you are having less capital in hand. For a beginner, it’s recommended to keep the leverage as low as possible. Keeping the leverage low will ensure that the losses are minimum.
An example of margin
The formula for calculating the margin is — Trade Size / Leverage X Account Currency Exchange Rate
To know this better, let us take an example of the AUD/CAD currency pair. In AUD/CAD, AUD is the base currency and for this example, we are taking volume in lots equals to 5 were on the standard lot it equals to 100K. And, we are taking the leverage of 5.
So, the volume in lots will be equal to 500,000 (5 x 100,000). We are calculating the example considering a standard lot which is 100,000. You can choose a different lot size and it could also be micro.
The next thing you will need for calculating the margin is the currency conversion rate. In our case, the rate is 0.95829.
Now, let’s calculate the margin from the above formula where:
- Volume In Lot: 5 (One Standard Lot = 100,000 Units)
- Account Base Currency: AUD
- Trading Pair: AUD/CAD
- Exchange Rate: 0.95829
The calculation for required margin will go like this: 500,000/5*0.95829
Required margin is 95828.50 In Cad and when you convert it into AUD, it is 99987.34. Depending on the currency pair, you need to calculate the current exchange rate to calculate the accurate required margin.
Use of Margin Calculator?
Many experienced traders say a margin calculator is a vital tool for every trader. In a complex environment of investing, it becomes important to manage all things on the go. And, one such thing is margin and this calculator performs the same as its suggested. This performs the calculation of the required margin between the trader and the broker.
Margin accounts are not here for producing capacity, but it helps the traders in another way. It let the trader perform trading with the least funds available and get a higher investment cap.
The margin calculator shows the part of a margin available between the trader and the broker. This tool shows the available funds to the margin in the account. This is helpful to know the amount in case the trader met with a loss.
If you are a beginner, you need to take care of some important things. For example, the investor can withdraw the margin in an inappropriate way anytime. And, this activity will be different from the actual fund capacity. This decision will cause a loss to the market trader.
Understand Margin Criteria In Trading
When it comes to fixing the margin, it’s set by the Federal Reserve Board under the special federal regulations. For those who don’t know, the initial margin that a trader will get is 50%. This is available at the time when you buy stocks.
Now, what does issuing a margin call mean? We are here to get you through this in simple terms. In this condition, the trader will pay the difference or the broker will sell your stocks to cover the loss.
To avoid such conditions, you have to keep a watch on your margin limits. Keep checking them and call your broker if you don’t understand anything. By doing so, you will save both your energy and liquidity. This forex margin calculator brings in many vital uses. If you are planning to go full time, this is a must tool to have in daily practices.
Once you learn to use this tool, you can scale up your trading skills. It will definitely give you an edge with you to start investing high amounts in the market. It will help you in making more profits from the minimum available amount when used in the right way.
Many beginners try to use the margin to the fullest but it comes with a higher risk. This is so because when a trader doesn’t know how exactly to use it, they tend to make a financial loss.
How Much margin should you use while trading?
At the end of the day, the margin is a debt that you take from your broker. So, you need to operate the margin with moderation. In trading, it gives you leverage in the market that helps you boost your investing capacity.
Margin works like when a trader thinks that the return will be higher through margin as compared to the interest, the broker will get a commission.
In this condition, the broker has your assets and it works as security to balance out the margin. In a simple way, it’s like you go out to buy a house but on a mortgage. On the other side, this feature of trading also comes with many benefits.
For example, a trader did not need to deposit margin bills on a month to month basis. And, the broker is also at ease as long as you have funds to cover up the margin in case you lose it.
If you think about if this practice in trading is good or bad, it’s your call. If you have some experience of how the market works, this could be an opportunity. On the flip side, it’s like maxing the credit card limit without knowing what you have bought.
Once you learn how to use the margin like a pro through a margin calculator, you can make good capital. It works on a simple formula which includes margin, stock’s value, and the amount value a broker will give.
When To Avoid Using This Calculator In Trading?
There are many situations in online trading when it’s only appropriate to use this functionality. The first thing is that never use margin to buy shares that will give less interest than your margin output. In this condition, you will end up giving away more money than what you are making.
Another situation traders need to avoid is putting money in MLP, REIT, or utility companies. The idea is to not to buy stocks that produce fewer dividends than your margin commission. Otherwise, the trader needs to pay more in the form of commissions.
Another important thing to follow is never to use margin to buy liabilities. Don’t use it to give the downpayment of any liability. This is because the concept of margin in forex is to create more money and not more liability in life.
Take profit from the market using a margin calculator
When the market conditions are favourable, a trader can use the margin calculator and take advantage of the volatility. Many professional traders recommend opting for using the margins to settle outstanding payments.
In the end, it’s up to you how you plan your trading strategy and use the margin in your forex trading. It helps you refine your budgeting while you trade in the market.
Disclaimer: The article above does not represent investment advice or an investment proposal and should not be acknowledged as so. The information beforehand does not constitute an encouragement to trade, and it does not warrant or foretell the future performance of the markets. The investor remains singly responsible for the risk of their conclusions. The analysis and remark displayed do not involve any consideration of your particular investment goals, economic situations, or requirements.