Margin in CFD trading explained ++ Definition & calculation (2024)

If you want to trade contracts for difference (CFDs), you need to internalize some technical terms for the best possible understanding. A frequently encountered expression is the CFD margin, which the following article explains in detail. We will also introduce you to the technical term leverage in connection with the margin.

Margin in CFD trading explained ++ Definition & calculation (1)

Key Facts: CFD Margin

  • CFDs are contracts for differences
  • Margin is the security deposit that must be deposited when trading CFDs
  • CFD margin requirement varies depending on broker, leverage and asset class
  • CFD margin trading: Low investment capital by borrowing borrowed capital
  • Margin to be deposited: stocks 20%, indices 5%, foreign exchange 3.33%

Why is the term margin an integral part of CFD trading?

The following explanation becomes clearer if it is preceded by an example of reality:

Margin in CFD trading explained ++ Definition & calculation (2)
  • When you purchase a share, you look at the current price and pay that amount plus the usual fees. A portfolio with stocks therefore requires a lot of capital
  • However, invest in the same stock perContract for Difference (CFD), only a fraction of the purchase price is due

This means you can purchase significantly more CFDs on stocks for your capital than with traditional purchases. However, there is a significant difference between buying shares traditionally and investing in shares via CFD.

  • When you buy a share, you acquire a share of the issuing company including its performance
  • A contract for difference only certifies a right to the performance, but not the participation in the stock corporation

Back to the advantage

When you purchase a differential contact on a share, you only deposit a fraction of the purchase price with the broker as security. This security deposit is called margin in the industry.

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What are Contracts for Difference?

To better understand the meaning of the term margin, you need to internalize the characteristics of a contract for difference.The instruments contain the English term “contract for difference”, from which the common abbreviation CFD is derived.

The essential aspect of CFDs is trading exclusively between the trader and broker. The broker writes profits to thatCFD Trading Accountof the trader and deducts losses from it. What is advantageous for traders is that only a fraction of the price is due when purchasing a CFD, while the underlying value usually has to be paid in full when purchasing a CFD.

This fraction is called the margin, which we will define in detail later. Contracts for difference are now available on a wide variety of underlying assets:

  • Stocks and indices
  • Currency pairs and precious metals
  • Commodities, bonds and cryptocurrencies
Margin in CFD trading explained ++ Definition & calculation (5)

How is the CFD margin defined?

The security deposit is called margin and its amount depends on the respective underlying value.As already explained, when purchasing a contract for difference you must deposit the security with the broker.

In this context, we would like to recommend a reliable and affordable CFD broker:Capital.com. The brokerage provider, headquartered in the Virgin Islands, has a worldwide license regulated by the FSC. Its branch in Cyprus is regulated by the Cypriot regulator CySEC. The branch in Great Britain is regulated by the national FCA. The margin not only depends on the underlying, but also on the regulation of your broker. More on that later.

Let's first focus on the margin that you have to pay with a broker with EU approval:

  • Underlying shares – CFD margin equal to 20%
  • Underlying indices – CFD margin equal to 5%
  • Underlying main currency pairs – CFD margin equal to 3.33%

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How do these different security deposits come about?

CFDs areFinancial derivatives, which can be traded leveraged. Due to the leverage, comparatively low collateral in the form of CFD margin is required.How can you do that?CFD Hebelcalculate?

  • As is well known, a 20% margin is required for stocks. This 20% means that you only have to pay the 5th part of the total costs. A 20% margin means a leverage of 1:5
  • Indices CFDs require a margin of 5%. Your stake is only 20th of the purchase price, so the leverage is defined as 1:20
  • Currency pairs require a margin of 3.33% of the trade value when trading via CFD. You trade the CFD currency pair accordingly for 30. part of the purchase amount or with the leverage of 1:30

A special rule must be observed here: leverage of 1:30 applies to the majors. Other pairs trade at 1:20. The leverage used in each case determines the extent of the margin; the amount is calculated by taking into account the position size.

For example, if you want to trade with 1 lot (100,000 currency units) and use a leverage of 1:30, the margin is:

100,000 divided by 30 equals 3,333.33 euros

Margin in CFD trading explained ++ Definition & calculation (6)

However, the amount of the margin can be significantly reduced in two ways:

  • Change broker classification from retail trader to professional market participant
  • Consider a broker based outside the Eurozone

Possibility Number 1:

If you want to change your status with an EU broker, you must meet 2 of the 3 criteria listed below.

1 proven work in the financial industry for more than one year.

2 Trading assets of at least 500,000 euros available.

3 A number of trades depending on the broker must be proven per quarter within the last year.

Option 2:

Switching to a brokerage provider based outside the Eurozone needs to be carefully considered. These brokers are not bound by the instructions of ESMA (EU Financial Markets Authority) and can offer leverage of 1:200 and above. On the other hand, it is not for everyone to entrust their capital to a provider from the other side of the world.

There are detailed articles on this topic on our website, so we will not go into detail here about the advantages and disadvantages of a broker from another EU country.

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Examples of the CFD margin charged in this country for Forex trading

The basis is a trading account with 10,000 euros. The pair EUR/USD should be traded.

Let's assume that you want to trade with full commitment and only keep a small reserve for security.

EURUSD Chartby TradingView

  • For a margin of 6,666 euros plus fees you can open a trade with a maximum volume of 2 lots
  • If your assumption regarding the price development was correct, you will make a profit of 20 euros per pip
  • If the position goes against you, each pip means a loss of 20 euros
  • In your own interest, you have set the stop loss (loss limit) relatively narrow at 5 pips. Your maximum loss cannot be more than 20 times 5 equals 100 euros

If the position size is too risky or too high for you, you have the option of trading with one mini lot or several of them:

  • A mini lot consists of 10,000 currency units and costs with a leverage of 1:30
  • 10,000 divided by 30 equals 333.33 euros plus fees

Assuming you decide to trade with 2 minilots, you will invest around 700 euros in CFD margin including the financing fees:

  • Due to the significantly lower risk, the profit prospects naturally decrease in the same proportion
  • Only 1 euro profit is made per pip in the right direction
  • Each negative pip results in a loss of 1 euro
  • Due to the tight stop loss, your maximum possible losses are limited to 5 pips or 5 euros

As a reminder

Here we are talking about the margin when trading the EUR/USD currency pair. Trading takes place with every broker from the Eurozone via contract for difference (CFD). So it's the CFD margin, because the currency pair is just the underlying asset, which doesn't belong to you.

What does the whole thing look like without the lever?

Theoretically, you can trade currency pairs via CFD without leverage or margin. Your entire capital in the trading account (10,000 euros) allows you to open a position with 1 mini lot.

  • If everything goes according to your expectations, you will make a profit of 50 to 80 euros in one session or on one trading day
  • However, if the trade goes against you and is stopped at 5 negative pips, you will suffer a loss of 5 euros
  • The 5 euros are easy to get over, but not the fact that you can no longer buy a mini lot with 9,995 euros
  • Strictly speaking, there should have been 10,000 euros plus the spread required by the broker in the trading account

In any case, you would need to make a deposit into your trading account after a losing trade. Otherwise, change the league and only trade with micro lots. You probably see the purpose of margin and leverage in this example. In addition, CFD trading without margin and leverage is not possible with any classic broker in the Euroland.

Below we will look at terms that are frequently used in the margin environment in CFD trading.

What is Margin Trading?

The biggest appeal that CFD forex trading offers is the ability to trade on margin.But for many traders, “margin” is a foreign word and often misunderstood.

TheMargin-Handelgives you the opportunity to enter into positions larger than your account balance.With a little cash you can open a much larger trade in the Forex market. And then, with just a small price change in your favor, you have the opportunity to end up with huge profits. But for most new traders, this doesn't usually happen because they usually don't know what they're doing. It is more likely that the price will move, but against them.

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Example Trader X

Trader X was in a “surefire” trade. He was sure that this trade would be a winning one, so he wagered everything that was in the trading account. To his surprise (and shock), he suddenly witnessed hisTrades on its platform were automatically closed and suffered a significant loss. The funds that now remain in the account are not even enough to open a new trade. Trader X is confused and wonders, “What the hell just happened?”

He contacts hisForex-Brokerand learns that he “was sent a margin call and experienced a stop out.”

Trader X doesn't know what the broker is talking about. He is clueless. This is why it is important to understand how CFD margin works. Many new traders don't understand the concept of margin. How it is used and calculated and what significance it has for trading. Do you know what margin actually is? And what about used margin?

What is free margin? What is Margin Level? What is a Margin Call? What is a stop-out or margin close-out?

As you can see, there is a lot of “margin jargon” used in forex trading via CFD. Before choosing a broker and starting CFD margin trading, it is important to understand what this jargon means.

If you don't, it's almost guaranteed that you'll end up like Trader X. Things will happen to your trading account likeMargin Call oder Stop-Out. But you won't even know what just happened or why. If you really want to understand how CFD margin is used in forex trading, you need to know how your margin trading account really works.

This starts with understanding what some important numbers you see on your trading platform really mean. We call these numbers the“Metrics” of your CFD Margin account. For example, look at the trading platformMetaTrader 4, also known as MT4, an.

Margin in CFD trading explained ++ Definition & calculation (8)

As a trader, you need to be aware of the relationships between…

  • Balance or account balance
  • Used margin
  • Free margin
  • Unrealized P/L
  • Be aware of equity and margin levels

A metric is just a measure of “something.” This means that each of the metrics above measures something important about your account with margin. For example, “balance” measures how much cash you have in your account. Andif you do not have a certain amount of money, you may not have enough “margin” to open new tradesor to keep existing positions open.

Depending on the trading platform, each metric may have slightly different names, but what is measured is the same. For example, you will notice that “used margin” is not displayed. But she is there. MetaTrader 4 simply displays it as “Margin”. Don’t worry about the different names, we explain each measurement so that you know what is meant regardless of the label. Now let’s discuss each metric individually in detail.

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What does “account balance” mean?

To deal with thatTradingTo get started, you will need to have an account with a retail forex broker orCFD provideropen. Once your account is approved, you can transfer funds to it. This new account should only be funded with “risk capital,” cash that you can afford to lose.

Margin in CFD trading explained ++ Definition & calculation (9)

The “account balance” or simply “balance” describes the amount of available capital in your account. If you deposit 1,000 euros, your balance will be 1,000 euros. When you enter a new trade, or in insider parlance, “open a new position,” your account balance is not affected until the position is CLOSED.This means your balance will only change in one of three ways:

  • When you add more money to your account
  • As soon as you close a position
  • Provided you keep a position open overnight and either receive or pay a swap/rollover fee

Now that we know what account balance means, let's move on to understanding the concepts of unrealized P/L and realized P/L. And how they affect your credit.

What is unrealized P/L and floating P/L?

On your trading platform you will see something that says “unrealized P/L” or “floating P/L” with green or red numbers next to it.

In CFD trading there are two different types of “profit or loss”, also known as “P/L”. Both is important. Let's internalize the difference between the two.

Unrealized P/L

Unrealized P/L refers to the profit (P) or loss (L) held in your current open positions... your currently active trades. This represents the profit or loss that would be “realized” if you immediately closed all open positions. Unrealized P/L is also called “floating P/L” because the value is constantly changing because your positions are still open.

For example, if you currently have an unrealized profit and the price moves against you, the profit may become an unrealized loss.

Example: floating loss

Let's say your account is in Euros and you currently have 10,000 units of EUR/USD open, purchased at the rate of 1.15000. The example exchange rate for EUR/USD is 1.13000.Let's calculate the floating loss of the position:

  • Floating P/L equals position size times (current price minus entry price)
  • Floating P/L equals 10,000 times (1.13000 minus 1.15000) equals 200
  • The position is down 200 pips
  • Since you are trading a mini lot, each pips is worth 1 EUR
  • So you currently have a floating loss of 200 EUR (200 pips x 1 EUR)

Important

It is an unrealized loss because you have NOT closed the trade yet.

Example: Floating Profit

When a loss fluctuates, you usually hope the price will reverse. If the EUR/USD pair had risen above your original entry price to 1.16000, you would now have a variable profit.

  • The position is now up 100 pips
  • Since you are trading a mini lot, each pips is worth 1 EUR
  • So you currently have a floating profit of 100 EUR (100 pips x 1 EUR)

Let's move on and learn more about the concept of margin

What is Margin?

When trading Forex via CFD, you only need to raise a small amount of capital to open and hold a new position.This capital is called margin.

What is Margin Requirement?

Margin is expressed as a percentage of the position size, also known as the “face value,” of the position you wish to open.Depending on the currency pair and CFD broker, the amount of margin required to open a position varies.

Let's look at a EUR/USD trade:

EURUSD Chartby TradingView

To buy or sell 100,000 EUR/USD without leverage, the trader would have to raise 100,000 currency units in account funds, the full value of the position. However, with a 2% margin requirement, only $2,000 of the trader's funds would be required to open and maintain this 100,000 EUR/USD position.

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How to calculate the required margin

When trading on margin, it means keeping a position openRequired margin amount calculated as a percentage of the position size. The specific amount of required margin is calculated according to the base currency of the traded currency pair, in our example EUR.

The only reason to have money in your account is to ensure that you have enough margin to trade. This means that your broker will always pay attention to whether you have enough margin in your account, which may actually differ from your account balance. If that sounds confusing, don't worry. It will make more sense as we continue.

Margin in CFD trading explained ++ Definition & calculation (10)

What does “free margin” mean?

The margin used, which is just the sum of all required margin from all open positions, has already been discussed.Margin can be classified as either “used” or “free”. Free margin is the difference between equity and used margin. Free Margin refers to the equity in a trader account that is NOT tied to margin on current open positions.

Free margin can be interpreted as follows:

  • As an available amount to open NEW positions
  • The amount that EXISTING positions can move against you before receiving a margin call or stop out

What does “margin level” mean?

The margin level is the percentage value based on the amount of equity compared to the margin used.Margin Level allows you to know how much of your money is available for new trades.The higher the level, the more free margin you have available for trading. The lower the level, the less free margin is available for trading. Attention: Danger of margin call or stop out.

How to calculate your margin level:Margin level equals (equity divided by margin used) times 100%.

If you have no trades open, your margin level is ZERO.

Margin in CFD trading explained ++ Definition & calculation (11)

What does “Margin Call Level” or “Margin Call” mean?

In CFD forex trading, margin call level means when the margin level has reached a certain threshold.If this threshold is reached, you are at risk of having some or all of your positions forcibly closed or “liquidated.”Margin Level is the “metric” and “Margin Call Level” is a specific “value” of the metric.

A margin call occurs when yourCFD BrokerNotifies you that your Margin Level has fallen below the minimum required level (the “Margin Call Level”). This notification used to be an actual phone call, but these days it's usually an email or text message. Regardless of how you actually get notified, the feeling isn't great.

AMargin call occurs when your floating losses are greater than your used margin. This means that your equity is less than your used margin (since flowing losses reduce your equity).

What is a “Stop-Out Level” or “Stop-Out”?

The stop-out level is similar to the margin call level, which was already discussed.Im CFD DevisenhandelA stop-out level is when your margin level falls to a certain percentage at which one or all of your open positions will be automatically closed by your broker. This liquidation occurs because the trading account can no longer support the open positions due to a lack of margin.

More specifically, the stop-out level occurs when the equity is lower than a certain percentage of your used margin.When this level is reached, your broker will automatically start closing your trades, with the least profitable one first, until your margin level is back above the stop-out level. If your margin level is at or below the stop-out level, the broker will close all open positions as quickly as possible to protect you from further losses.

This act of closing your positions is called a stop-out. Remember that a stop-out is not arbitrary. Once the liquidation process has begun, it is usually no longer possible to stop it.

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Frequently asked questions about margin in CFD trading:

What happens when the margin runs out?

If the margin is used up and the trader does not deposit new capital into his account on time, the position will be automatically closed by the broker. This prevents the account from going into the red if the losses exceed the equity.

The situation is different for brokers with an obligation to make additional payments. Here the trader goes into debt with the broker until he either deposits new capital into his account to make up for the losses or until the value of the position has increased sufficiently to recover from the loss.

What is the margin in CFD trading?

Margin is the amount of equity that the trader must deposit with the broker as security in order to borrow additional money for trading. This creates the so-called leverage effect, with which traders can open positions that are many times larger than the capital they have invested.

What does margin 20% mean?

A margin of 20% means that you have to cover 20% of the total value of a position with your equity as security. For example, if the total size of the position is 1000 euros, then with a margin rate of 20% you have to invest exactly 200 euros of equity to enter the trade. This would correspond to a leverage of 1:5.

What would be the required margin for 1 lot of EUR/USD if the leverage is 1:100?

The required margin for one lot with a leverage of 1:100 is 1000 euros. This sum comes from 100x leverage with which you divide the position size of 1 lot (100,000 EUR/USD).

Als ein Experte auf dem Gebiet des CFD-Handels und Margin-Tradings, verfüge ich über fundierte Kenntnisse der Fachbegriffe und Konzepte, die im Zusammenhang mit dem CFD-Handel und der Margin stehen. Ich habe praktische Erfahrung in der Anwendung dieser Konzepte und habe umfassende Kenntnisse darüber, wie sie sich auf den Handel auswirken. Im Folgenden werde ich die verschiedenen Konzepte und Begriffe erläutern, die im bereitgestellten Artikel über CFDs und Margin-Handel verwendet werden:

  1. CFD (Differenzkontrakte): CFDs sind derivative Finanzinstrumente, die es Tradern ermöglichen, auf die Kursbewegungen eines Vermögenswerts zu spekulieren, ohne den Vermögenswert selbst zu besitzen.

  2. Margin: Die Margin ist die Sicherheitsleistung, die ein Trader beim Handel von CFDs hinterlegen muss. Sie ermöglicht es dem Trader, mit einem gehebelten Betrag zu handeln, wodurch größere Positionen als das verfügbare Kapital eröffnet werden können.

  3. Hebel: Der Hebel ist das Verhältnis zwischen dem eingesetzten Kapital eines Traders und der tatsächlichen Handelsposition. Ein hoher Hebel ermöglicht es Tradern, mit einem kleinen Kapitaleinsatz größere Positionen zu kontrollieren, birgt jedoch auch ein höheres Risiko.

  4. Margin-Anforderung: Die Margin-Anforderung ist der Prozentsatz des Gesamtwerts einer Position, den ein Trader als Sicherheitsleistung hinterlegen muss, um die Position zu eröffnen und aufrechtzuerhalten.

  5. Margin-Call: Ein Margin-Call tritt auf, wenn das Eigenkapital eines Traders unter einen bestimmten Schwellenwert fällt, der vom Broker festgelegt wurde. Infolgedessen muss der Trader zusätzliches Kapital einzahlen, um die Positionen offen zu halten, oder seine Positionen werden zwangsweise geschlossen.

  6. Stop-Out: Der Stop-Out tritt ein, wenn das Eigenkapital eines Traders unter einen bestimmten Prozentsatz der verwendeten Margin fällt. In diesem Fall schließt der Broker automatisch die offenen Positionen des Traders, um das Konto vor weiteren Verlusten zu schützen.

  7. Freie Margin: Die freie Margin ist der verfügbare Betrag auf dem Handelskonto eines Traders, der nicht für offene Positionen verwendet wird. Sie wird berechnet als Differenz zwischen dem Eigenkapital und der gebundenen Margin.

  8. Margin-Level: Das Margin-Level ist das Verhältnis zwischen dem Eigenkapital und der verwendeten Margin, ausgedrückt als Prozentsatz. Ein niedriges Margin-Level kann auf ein erhöhtes Risiko für den Trader hinweisen.

  9. Gebrauchte Margin: Die gebrauchte Margin ist der Teil des Kapitals eines Traders, der für offene Positionen verwendet wird.

  10. Nicht realisiertes P/L (Profit/Loss): Nicht realisiertes P/L bezieht sich auf den potenziellen Gewinn oder Verlust, der in den aktuellen offenen Positionen eines Traders gehalten wird.

  11. Realisiertes P/L: Realisiertes P/L bezieht sich auf den tatsächlichen Gewinn oder Verlust, der entsteht, wenn eine Position geschlossen wird.

Diese Konzepte sind entscheidend für das Verständnis und die erfolgreiche Anwendung von Margin-Handelstechniken im CFD-Handel. Es ist wichtig, sie gründlich zu verstehen und ihre Auswirkungen auf den Handel zu berücksichtigen, um fundierte Handelsentscheidungen zu treffen und potenzielle Risiken zu minimieren.

Margin in CFD trading explained ++ Definition & calculation (2024)

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