What is Margin Requirement?

Margin is expressed as a percentage (%) of the “full position size”, also known as the “Notional Value” of the position you wish to open.

Depending on the currency pair and forex broker, the amount of margin required to open a position VARIES.

You may see margin requirements such as 0.25%, 0.5%, 1%, 2%, 5%, 10% or higher.

This percentage (%) is known as the Margin Requirement.

Here are some examples of margin requirements for several currency pairs:

Currency Pair Margin Requirement
EUR/USD 2%
GBP/USD 5%
USD/JPY 4%
EUR/AUD 3%

What is Required Margin?

When margin is expressed as a specific amount of your account’s currency, this amount is known as the Required Margin.

EACH position you open will have its own Required Margin amount that will need to be “locked up”.

Required Margin is also known as Deposit Margin, Entry Margin, or Initial Margin.

Let’s look at a typical EUR/USD (euro against U.S. dollar) trade. To buy or sell a 100,000 of EUR/USD without leverage would require the trader to put up $100,000 in account funds, the full value of the position.

But with a Margin Requirement of 2%, only $2,000 (the “Required Margin“) of the trader’s funds would be required to open and maintain that $100,000 EUR/USD position.

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What is Margin?

When trading forex, you are only required to put up a small amount of capital to open and maintain a new position.

This capital is known as the margin.

For example, if you want to buy $100,000 worth of USD/JPY, you don’t need to put up the full amount, you only need to put up a portion, like $3,000. The actual amount depends on your forex broker or CFD provider.

Margin can be thought of as a good faith deposit or collateral that’s needed to open a position and keep it open.

It is a “good faith” assurance that you can afford to hold the trade until it is closed.

Margin is NOT a fee or a transaction cost.

Margin is simply a portion of your funds that your forex broker sets aside from your account balance to keep your trade open and to ensure that you can cover the potential loss of the trade.

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What is Account Balance?

Once your account is approved, then you can transfer funds into the account.

This new account should only be funded with “risk capital”, which is cash you can afford to lose.

The “Account Balance” or simply “Balance” is the starting balance of your account.

Basically, it’s the amount of CASH in your account.

 

Think of it this way:

Balance = CashYour Balance measures the amount of cash you have in your trading account.

If you deposit $1,000, then your Balance is $1,000.

If you enter a new trade or in trader lingo, “open a new position”, your account balance is not affected until the position is CLOSED.

This means that your Balance will only change in one of three ways:

  1. When you add more funds to your account.
  2. When you close a position.
  3. When you keep a position open overnight and either receive or pay swap/rollover fee.

Since the topic is about margin, the concepts of swap and rollover aren’t really related but for thoroughness, we’ll quickly describe it since swap fees do affect your Balance.

 

The procedure of moving open positions from one trading day to another is called a rollover.

During this rollover, a swap is calculated.

A swap is a FEE that is either paid or charged to you at the end of each trading day if you keep your trade open overnight.

If you are paid swap, cash will be added to your Balance.

If you are charged a swap, cash will be deducted from your Balance.

Unless you’re trading huge position sizes, these swap fees are usually small but can add up over time.

In MetaTrader, you can see swaps on your open position (if you keep it open for longer than 1 day) by opening a “Terminal” window and clicking on the “Trade” tab.

Swap in Forex

The concept of swap and rollover is beyond the scope of this lesson and will not be discussed further, but we just wanted to cover if briefly for accuracy’s sake.

Now that we know what Balance means, let’s move on to understanding the concepts of “Unrealized P/L” and “Realized P/L” and how they affect your Balance.

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Why Trade Forex: Advantages Of Forex Trading

There are many benefits and advantages of trading forex.

Here are just a few reasons why so many people are choosing this market:

No commissions

No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail forex brokers are compensated for their services through something called the “spread“.

No fixed lot size

In the futures markets, lot or contract sizes are determined by the exchanges. For example, a standard-sized contract for silver futures is 5,000 ounces.

 

In forex, you can trade smaller lot sizes or position size. This allows traders to open trades as small as 1,000 units.

 

Low transaction costs

The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions.

For larger transactions, the spread could be as low as 0.07%. Of course, this depends on your leverage, and all that will be explained later.

A 24-hour market

There is no waiting for the opening bell. From the Monday morning opening in Australia to the Friday afternoon close in New York, the forex market never sleeps.

 

This is awesome for those who want to trade on a part-time basis because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.

The FX market is sufficiently liquid that significant manipulation by any single entity is all but impossible during active trading hours for the major currencies.

The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.

Leverage

In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.

For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on.

While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

Deep Liquidity

Because the forex market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse, you can instantaneously buy and sell at will.

You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).

Low Barriers to Entry

You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options, or futures, it doesn’t. Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $50.

We are NOT saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.

Free Stuff Everywhere!

Most online forex brokers offer “demo” accounts to practice trading and build your skills, along with real-time forex news and charting services.

And guess what?! They’re all free!

Demo accounts are very valuable resources for those who are “financially hampered” and would like to hone their trading skills with “play money” before opening a live trading account and risking real money.

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Best Days of the Week to Trade Forex

So now we know that the London session is the busiest out of all the other sessions, but there are also certain days in the week where all the markets tend to show more movement.

Know the best days of the week to trade forex.

 

Below is a chart of the average pip range for the major pairs for each day of the week:

 

PAIR SUNDAY MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
EUR/USD 69 109 142 136 145 144
GBP/USD 73 149 172 152 169 179
USD/JPY 41 65 82 91 124 98
AUD/USD 58 84 114 99 115 111
NZD/USD 28 81 98 87 100 96
USD/CAD 43 93 112 106 120 125
USD/CHF 55 84 119 107 104 116
EUR/JPY 19 133 178 159 223 192
GBP/JPY 100 169 213 179 270 232
EUR/GBP 35 74 81 79 75 91
EUR/CHF 35 55 55 64 87 76

As you can see from the chart above, it’s best to trade during the middle of the week, since this is when the most action happens.

 

Fridays are usually busy until 12:00 pm EST and then the market pretty much drops dead until it closes at 5:00 pm EST. This means we only work half-days on Fridays.

 

The weekend always starts early! Yippee!

So based on all these, we’ve learned when the busiest and best days of the week to trade forex are.

The busiest times are usually the best times to trade since high volatility tends to present more opportunities.

Managing Yo Time Wisely

Unless you’re Edward Cullen, who does not sleep, there is no way you can trade all sessions. Even if you could, why would you?

While the forex market is open 24 hours daily, it doesn’t mean that action happens all the time!

Besides, sleep is an integral part of a healthy lifestyle!

 

You need sleep to recharge and have energy so that you can do even the most mundane tasks like mowing the lawn, talking to your spouse, taking the dog for a walk, or organizing your stamp collection.

 

You’ll definitely need your rest if you plan on becoming a hotshot currency trader.

Every trader should learn when to trade.

Actually, scratch that.

Every trader should know when to trade and when NOT to trade.

Knowing the optimal times you should trade and the times when you should sit out and just play some Fortnite instead.

Here’s a quick cheat sheet of the best and worst times to trade:

Best Times to Trade:

  • When two sessions are overlapping of course! These are also the times where major news events come out to potentially spark some volatility and directional movements. Make sure you bookmark the Market Hours cheat sheet to take note of the Opening and Closing times.
  • The European session tends to be the busiest out of the three.
  • The middle of the week typically shows the most movement, as the pip range widens for most of the major currency pairs.

Worst Times to Trade:

  • Sundays – everyone is sleeping or enjoying their weekend!
  • Fridays – liquidity dies down during the latter part of the U.S. session.
  • Holidays – everybody is taking a break.
  • Major news events – you don’t want to get whipsawed!
  • When you just broke up with your significant other because you chose trading forex over him or her. Wait until the next London session instead.

Can’t seem to trade during the optimal sessions? Don’t fret.

You can always be a swing or position trader. We’ll get back to that later.

Meanwhile, let’s move on to how you actually make money trading currencies. Excited? You should be!

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Best Times of Day to Trade Forex

What does this have to do with trading sessions? Well, just like TV, “ratings” (a.k.a. liquidity) are at their highest when there are more people participating in the markets.

Forex Trading Session Overlaps

Logically, you would think that this happens during the overlap between the two sessions.

 

If you thought that way, you’d only be half-right.

 

Let’s discuss some of the characteristics of the two overlap sessions to see why.

Tokyo – London Overlap

Tokyo-London Overlap

Liquidity during this session is pretty thin for a few reasons. Typically, there isn’t as much movement during the Asian session so, once the afternoon hits, it’s pretty much a snooze fest. Zzzzzz.

 

With European traders just starting to get into their offices, trading can be boring as liquidity dries up.

 

This would be an ideal time to take a chill pill, play some putt-putt golf, or look for potential trades to take for the London and New York sessions.

London – New York Overlap

London-New York Overlap

According to the latest data from FXLIQUIDITY, an analytics service for the FX market, liquidity is at an optimum level around 10 am and 3 pm London time (10 am NY time).

This is when the real shebang begins! You can literally hear traders crack their knuckles during this time because they know they have their work cut out for them.

 

This is the busiest time of day, as traders from the two largest financial centers (London and New York) begin duking it out.

 

It is during this period where we can see some big moves, especially when news reports from the U.S. and Canada are released.

The markets can also be hit by “late” news coming out of Europe.

If any trends were established during the European session, we could see the trend continue, as U.S. traders decide to jump in and establish their positions after reading up what happened earlier in the day.

Lastly, it’s important to know that it is during this period where the WM/Refinitiv Spot Benchmark Rate is determined. The rate is set at 4 pm London time, and also known as the “London fix”.

A currency “fixing” is a set time each day when the prices of currencies for commercial transactions are set, or fixed.

Since currency prices fluctuate from second to second, a daily “reference point” is needed.

Banks and other financial institutions use this daily rate to set their currency exchange rates, which in turn determine the prices used in corporate foreign exchange transactions.

From a trading standpoint, this daily fix may see a flurry of trading in the market prior (generally 15 to 30 minutes) to the fixing time that abruptly disappears exactly at the fixing time.

Lastly, some European traders may be closing their positions as their day ends, which could lead to some choppy moves right before lunchtime in the U.S.

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When Can You Trade Forex: New York Session

Right as European traders are getting back from their lunch breaks, the U.S. session begins at 8:00 am EST as traders start rolling into the office.

Just like Asia and Europe, the U.S. session has one major financial center that the markets keep their eyes on.

 

We’re talking of course, about the “City That Never Sleeps!

 

New York City baby! The concrete jungle where dreams are made of!

About 17% of all forex transactions happen in New York. 

Some traders also refer to the New York session as the “North American” trading session.

That’s because aside from New York, there are major financial centers open in North America as well, such as Toronto and Chicago.

Here are some tips you should know about trading during the New York session:

  • There is high liquidity during the morning, as it overlaps with the European session.
  • Most economic reports are released near the start of the New York session. Remember, about 85% of all trades involve the dollar, so whenever big-time U.S. economic data is released, it has the potential to move the markets.
  • Once European markets close shop, liquidity, and volatility tend to die down during the afternoon U.S. session.
  • There is very little movement Friday afternoon, as Asian traders are out singing in karaoke bars while European traders head off to the pub to watch the soccer match.
  • Also on Fridays, there is the chance of reversals in the second half of the session, as U.S. traders close their positions ahead of the weekend, in order to limit exposure to any weekend news.
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When Can You Trade Forex: London Session

While there are several financial centers all around Europe, it is London that market participants keep their eyes on.

London Session

Historically, London has always been at a center of trade, thanks to its strategic location.

Today, London benefits from its timezone. London’s morning overlaps with late trading in Asia and London’s afternoon overlap with New York City.

 

It’s no wonder that it is considered the forex capital of the world with thousands of folks making transactions every single minute.

 

About 43% of all forex transactions happen in London.

Some traders also refer to the London session as the “European” trading session.

That’s because aside from London, there are major financial centers open in Europe as well, such as Geneva, Frankfurt, Zurich, Luxembourg, Paris, Hamburg, Edinburgh, and Amsterdam.

Here are some neat facts about the European session:

  • Because the London session crosses with the two other major trading sessions–and with London being such a key financial center–a large chunk of forex transactions take place during this time. This leads to high liquidity and potentially lower transaction costs, i.e., lower pip spreads.
  • Due to the large number of transactions that take place, the London trading session is normally the most volatile session.
  • Most trends begin during the London session, and they typically will continue until the beginning of the New York session.
  • Volatility tends to die down in the middle of the session, as traders often go off to eat lunch before waiting for the New York trading period to begin.
  • Trends can sometimes reverse at the end of the London session, as European traders may decide to lock in profits.
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How do I calculate profit and loss?

Let’s buy U.S. dollars and sell Swiss francs.

  1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the “ASK” price of 1.4530, the rate at which traders are prepared to sell.
  2. So you buy 1 standard lot (100,000 units) at 1.4530.
  3. A few hours later, the price moves to 1.4550 and you decide to close your trade.
  4. The new quote for USD/CHF is 1.4550 / 1.4555. Since you initially bought to open the trade, to close the trade, you now must sell in order to close the trade so you must take the “BID” price of 1.4550. The price that traders are prepared to buy at.
  5. The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
  6. Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

Bid/Ask Spread

Remember, when you enter or exit a trade, you are subject to the spread in the bid/ask quote.

When you buy a currency, you will use the offer or ASK price. 

When you sell, you will use the BID price.

Next up, we’ll give you a roundup of the freshest forex lingos you’ve learned!

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What is leverage in forex?

You are probably wondering how a small investor like yourself can trade such large amounts of money.

Think of your broker as a bank that basically fronts you $100,000 to buy currencies.

All the bank asks from you is that you give it $1,000 as a good faith deposit, which it will hold for you but not necessarily keep.

Sounds too good to be true? This is how forex trading using leverage works.

The amount of leverage you use will depend on your broker and what you feel comfortable with.

Typically the broker will require a deposit, also known as “margin“.

Once you have deposited your money, you will then be able to trade. The broker will also specify how much margin is required per position (lot) traded.

For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account.

 

No problem as your broker would set aside $1,000 as a deposit and let you “borrow” the rest.

Of course, any losses or gains will be deducted or added to the remaining cash balance in your account.

The minimum security (margin) for each lot will vary from broker to broker.

In the example above, the broker required a 1% margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

Let’s say you want to buy 1 standard lot (100,000) of USD/JPY. If your account is allowed 100:1 leverage, you will have to put up $1,000 as margin.

The $1,000 is NOT a fee, it’s a deposit.

You get it back when you close your trade.

The reason the broker requires the deposit is that while the trade is open, there’s the risk that you could lose money on the position!

Assuming that this USD/JPY trade is the only position you have open in your account, you would have to maintain your account’s equity  (absolute value of your trading account) of at least $1,000 at all times in order to be allowed to keep the trade open.

If USD/JPY plummets and your trading losses cause your account equity to fall below $1,000, the broker’s system would automatically close out your trade to prevent further losses.

This is a safety mechanism to prevent your account balance from going negative.

Understanding how margin trading works is so important that we have dedicated a whole section to it later in the School.

It is a must-read if you don’t want to blow up your account!

Moving on for now…

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