But first, what is a required margin?
Before starting with our main topic, which is used margin, let us first talk about the required margin. Required margin is a portion or a percentage that you need to maintain and keep a position open. Traders need margin to cover any potential losses, and these percentages vary from one broker to another. You can open more than one position at the same time. These positions will individually have their required margin.
Now, let us hop on to the used margin.
If you decided that you want to open more than one position simultaneously, you would also have multiple required margins. And if you add all of these required margins, the total amount now is what we call used margin.
All of these used margins are locked. It means that they are there to keep an account open, but you cannot use them to make another trade. In short, when we think of a trade individually, we automatically think about the required margin. If we think about trades collectively, we can think about used margins.
Let us cite an example!
Erin made a deposit of $1,000 in her account because she’s been eyeing to open two positions involving two currency pairs. She wants to open:
- A long USD/ GBP position (mini lot with 10,000 units)
- A long USD/JPY position (also a mini lot with 10,000 units)
The margin requirement of a USD/ GBP position is 3%, while the USD/ JPY position’s margin requirement is 4%. Now, the question is: how much required margin is needed in each position? This case is relatively simple because they are both using USD as the base currency. By the way, the base currency is the first currency in the pair. Each position’s notional value is $10,000 since a mini lot is worth $10,000.
Let us calculate the required margin of the two positions starting with the USD/ GBP position.
We assumed that the margin requirement for USD/ GBP is 3%. Your trading account is also denominated in the USD, so there is no need to convert. Here is the equation:
Notional value * margin requirement = required margin
$10,000 * 0.03 = $300
Moving on to the USD/ JPY position’s required margin
We assumed that the margin requirement of the USD/ JPY is 4%. Again, your forex trading account is also in the USD denomination, so there is no need to convert. Here is how the equation goes:
Notional value * margin requirement = required margin
$10,000 * 0.04 = $400
For additional information, if your trading account’s denomination is not the same as the base currency, you will need to follow another equation to make sure that you have enough margin to keep a trade open. The equation goes something like this:
Required margin = Notional value * Margin requirement * Base and account currency exchange rate
Now, the used margin!
We ended have a required margin of $400 for the USD/ JPY position and $300 for the USD/ GBP position. If we add all of these required margins, our used margin is:
Used margin = USD/ JPY required margin + USD/ GBP required margin
$700= $400 + $300
