What beginner traders need to know: Margin and leverage in trading

The Difference Between “Used Money” and “Stored Money”

When you start trading with leverage, the first thing to understand is: the money you hold is not the cost. It is a “temporary guarantee” that the broker keeps to cover risks.

Suppose you want to control a position valued at $100,000. The broker will deduct only $1,000 from your account — this is the Initial Margin (Initial Margin). This principle allows you to “command” a 100x (leverage 100:1) of your actual capital.

How Does the Actual Margin Work?

Let’s be clear: Margin is not a fee. It is not a transaction cost but a sum that is (locked) at all times while your position remains open.

Every time you open a new trade, a percentage of your remaining account balance will be “locked” as a margin guarantee. When you close the position, this amount will be “released” back into your account for the next trade.

Simple Calculation of Initial Margin

Basic formula:

Initial Margin = Current Contract Value × Margin Ratio (%)

Practical example: If you use 200:1 leverage (which equals a margin ratio of 0.5%) and want to open a mini lot position of $10,000, you do not need to use the full amount.

Calculate using the formula: $10,000 × 0.5% = $50 only(

This is the power of margin — helping you control large positions with less capital.

Maintenance Margin: The Final Stage Before Broker Forced Closure

Maintenance Margin )Maintenance Margin(, also called Free Margin, is the minimum amount required in the account to keep the trading position active.

Maintenance Rule: You must keep at least 50% of the used margin )equity( or according to other requirements set by the broker ).

If your funds fall below this level, the broker has the right to close your position immediately without notice.

How to Calculate Maintenance Margin

Maintenance Margin = Current Contract Value (×) Margin Ratio

where:

Margin Ratio for Maintenance Margin (%) = Margin / Contract Value

Example: If you use an initial margin of $1,000, your funds must always be at least (.

Margin Call: A Warning Signal That Trading Is Becoming Unsafe

When your trade incurs losses, the initial margin may no longer be sufficient. At this point, the broker will send a “Margin Call” — asking you to deposit more funds.

Real scenario: Suppose your existing trade still requires $1,000 margin, but losses reduce your account balance to ). You will need to deposit more money $500 to avoid forced closure.

If you do not add funds, the broker will close your position to prevent further losses.

How Are Leverage and Margin Related?

Margin and leverage are like siblings — high leverage requires low margin $400 because you control large positions with less money$100 , and vice versa.

The key point is: Both are double-edged swords — they amplify profits in the market but also increase losses.

What Should You Remember?

1. Initial Margin = Guarantee to open a new position (locked until the position is closed).

2. Maintenance Margin = Minimum funds required to keep the position (can be lost during Margin Call).

3. Leverage = Double-edged weapon — be cautious to maintain balance; do not always use full leverage.

4. If heavy losses occur: Margin decreases and stabilizes until the broker announces a Margin Call. If no additional funds are added, the position will be automatically closed.