Margin is the amount of money needed as a “good faith deposit” to open a position with your broker. It is used by the broker to maintain your position. There are 2 types of margin found in common trading platform. First is Used Margin, the amount of money that broker has locked up to keep your current positions open. While this money is still yours, you can’t touch it until your broker gives it back to you either when you close your current positions or when you receive a margin call. Second is the Free Margin which is the money in your account that is available to open new positions. The margin indicates both the maximum possible leverage and the minimum amount required to open a position at a certain size. Additionally, the margin also plays a role as the credit limit to what the trader cannot surpass. Although VEVOFX offers its clients to trade with leverage up to 500:1, still margin and leverage are operated according to individual risk appetite and preference. VEVOFX doesn’t recommend trading near the full 500:1 of margin capability, this may create large amount of risk and exposure.
Contract sizes or better known as lots, is a necessary foundation when understanding the need and benefit for high leverage in the Forex market. Since one standard lot traded in the Forex market is a $100,000 contract, a trader is essentially placing a $100,000 trade in the market without leverage. As a result, most investors would difficult to afford such a transaction.
The offer of leverage of 500:1 would allow a trader to place the same one lot ($100,000) trade with only the post of $200 in the Used Margin to control a $100,000 position.
In event of the Equity (the value of your account) falls below the Used Margin due to trading losses, you will have to deposit more fund into your account or otherwise the trading platform will automatically close some or all of your trading position at the market price to prevent your account from falling into a negative balance. In order to continue trading after margin call, you have to deposit more fund into the account.
Trader A with a deposit of $5,000 USD for VEVOFX standard account, he had open one standard lot of long position on EURUSD. With the leverage of 500:1, he had used up $200 USD to hold this position with the remaining $4,800 as the Free Margin to open trade with and prevent margin call.
Unfortunately, the EURUSD dropped 500pips after a week due to some government financial crisis in Europe cause his Free Margin to drop beyond zero and triggered the margin level. In this case, the trading platform will automatically close the position to prevent the account from turning into credit. This event is known as margin call.