If you’ve ever wondered how traders manage to control huge positions with relatively small deposits, the answer lies in one word — margin. With margin, you can borrow money from your broker to buy assets that you could not buy with your cash alone. It can amplify your potential profits, but at the same time, it also poses a risk of loss.
So, if you are starting out, it’s important to understand how it works and how to manage it wisely. Here is a guide to using margin in forex and CFDs.
Understanding Margin
Margin is simply a small percentage of the total trade value that you have to deposit with your broker. It works as collateral to open and maintain a position. It offers bigger market exposure with less capital. But the downside? Losses can multiply just as fast as profits. A small market move in the wrong direction could wipe out your margin deposit, or your entire balance if you’re not careful.
Margin Trading in Forex
Forex trading is one of the most popular markets for margin trading because of its high liquidity and small price movements. Brokers often allow much higher leverage in forex compared to other assets, sometimes even up to 100:1, depending on regulations.
How it works
For example, in the UK, the margin rate for major currency pairs typically starts at 3.3%. Suppose you want to open a position worth $100,000. If your broker requires a 3.3% margin, you’ll need just $3300 in your account to control that position. As long as the market moves in your favor, you can earn profits that far exceed your initial deposit. But there’s a flip side. If the euro moves against your position, your losses are also amplified.
What is Margin Call, and how to avoid it
Most brokers set up margin calls — automatic warnings when your account equity falls below the required maintenance level. If you ignore the warning, your broker might liquidate your position to prevent further losses, something no trader wants to experience.
To trade forex safely on margin:
- Start with lower leverage, especially if you’re new.
- Always use stop-loss orders to cap potential losses.
- Keep track of your free margin, so you’re not caught off guard by sudden market swings.
Margin Trading in CFDs
CFD trading lets you speculate on the price movements of assets — like stocks, indices, or commodities — without actually owning them. Margin plays a central role here. It allows you to take control of larger positions with less capital, which helps to amplify potential gains and risks.
How It Works in CFDs
Say you’re trading a stock CFD priced at $42.50 and buy 1,000 units. That’s a total value of $42500. If your broker requires a 5% margin, you’ll only need $2,125 to open the position.
If the price rises to $45, your profit is $2,500 — doubling your margin. But if it drops to $40, you lose that same amount just as fast. That’s the double-edged sword of leverage in action.
How to avoid a margin call
Here are some tips to follow for risk management in CFD margin trading
- Set stop-loss order to minimize losses
- Respond to a margin call to avoid forced liquidation
- Monitor your positions to maintain the margin
