Used margin is the portion of a trader's deposited funds that are currently tied up as collateral to maintain open positions. It's a crucial metric in margin trading, as it helps determine how much leverage a trader is using.
So, what exactly does "Used Margin" mean?
To grasp the concept of Used Margin, we need to first comprehend what Required Margin is.
Every time you initiate a new position, a specific amount of Required Margin is allocated. We delved into Required Margin in detail in our previous lesson, so if you're unfamiliar with it, we recommend reading our lesson on "What is Margin?" first.
When you open multiple positions simultaneously, each individual position comes with its own Required Margin.
If you sum up the Required Margin for all the open positions, the resulting total is what we call Used Margin.
Used Margin comprises all the margin that is currently "locked up" and unavailable for use in opening new positions. In essence, this margin is already in use, hence the name "Used Margin."
While Required Margin is linked to a PARTICULAR trade, Used Margin encompasses the total amount of money you've had to deposit to maintain ALL your open trades.
Suppose you've deposited $1,000 into your trading account and intend to open TWO positions:
A long position in USD/JPY with a desire to open 1 mini lot (10,000 units) position.
A long position in USD/CHF with an intention to open 1 mini lot (10,000 units) position.
The Margin Requirement for each currency pair is as follows:
Currency Pair | Margin Requirement |
USD/JPY | 4% |
USD/CHF | 3% |
Now, let's determine the margin needed, termed "Required Margin," for each of these positions.
Given that USD serves as the base currency for both currency pairs, and a mini lot equals $10,000, the Notional Value for EACH position amounts to $10,000.
Let's calculate the Required Margin for EACH position:
The Margin Requirement for USD/JPY stands at 4%. Assuming your trading account is denominated in USD, the Required Margin for this position will be $400.
Required Margin = Notional Value x Margin Requirement
$400 = $10,000 x 0.04
The Margin Requirement for USD/CHF is 3%. Assuming your trading account is denominated in USD, the Required Margin for this position will amount to $300.
Required Margin = Notional Value x Margin Requirement
$300 = $10,000 x 0.03
Since you are dealing with TWO trades simultaneously, the total Used Margin in your trading account will be $700.
Used Margin = Sum of Required Margin from ALL open positions
$700 = $400 (USD/JPY) + $300 (USD/CHF)
To offer a visual representation of how Used Margin connects with Required Margin and Balance, here's a helpful diagram:
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