What is Margin Trading?
Contracts for Difference (CFDs) are leveraged financial instruments. This means you don’t need to pay the full value of a position to open a trade. Instead, you only need to deposit a small portion of the total exposure value. This deposit is known as initial margin or deposit margin.
Leverage allows you to gain significant market exposure with a relatively small amount of capital. However, it also increases both potential profits and potential losses.
How Margin Ratios Work
At most brokers, margin requirements are applied using a tiered system. Different margin rates apply to different position sizes. Smaller trades typically benefit from higher liquidity and therefore have lower margin requirements. As trade sizes increase, margin tiers step up, often through four distinct levels.
This structure helps balance risk management with market accessibility.
Tier 1 Margin Requirements
Below are examples of Tier 1 margin rates for popular markets. These rates apply to the smallest position sizes. It’s worth noting that using risk management tools, like stop-loss orders, can often reduce your margin requirement. By limiting your potential loss, a stop-loss order reduces your trade exposure, which may allow for a lower margin deposit.
Common markets with tiered margin include:
- Indices
- Forex
- Commodities
- Shares
- Cryptocurrencies
Sample Cryptocurrency CFD Margins
| Instrument | Margin Requirement | Leverage Ratio |
|---|---|---|
| Bitcoin | 50% | 1:2 |
| Ethereum | 50% | 1:2 |
| Ripple | 50% | 1:2 |
| Bitcoin Cash | 50% | 1:2 |
| Litecoin | 50% | 1:2 |
These rates are examples and can vary by broker and market conditions.
What is Maintenance Margin?
Maintenance margin, also referred to as variation margin, is additional funds that may be required if an open position moves against you. Its purpose is to ensure that your account maintains enough equity to cover the current value of the position, including any unrealized losses.
If your account balance falls below the maintenance margin level, you may receive a margin call. This is a notification requesting you to deposit additional funds to support your open positions. 👉 Learn more about managing margin levels
Failing to meet a margin call may result in the automatic closure of one or more positions by your broker.
Risk Management in CFD Trading
Effective risk management is essential when trading with leverage. Here are some widely recommended practices:
- Use stop-loss orders to define your maximum loss per trade.
- Monitor your account balance and margin usage regularly.
- Avoid overleveraging your account—utilize only a portion of your available capital.
- Stay informed about market events that could increase volatility.
Understanding margin requirements is a fundamental part of becoming a disciplined trader.
Frequently Asked Questions
What is a margin call?
A margin call occurs when your account equity falls below the maintenance margin requirement. You’ll be asked to deposit more funds or close positions to restore your account to the required level. It is a protective measure used by brokers to manage risk.
Can I avoid margin calls?
Yes, by carefully managing your leverage and using stop-loss orders, you can reduce the likelihood of a margin call. Regularly monitoring your open positions and account balance is also crucial.
How is leverage different from margin?
Leverage is the ability to control a large position with a small amount of capital, while margin is the amount of money required to open and maintain that leveraged position. They are two sides of the same concept.
Do all assets have the same margin rate?
No, margin rates vary significantly across different markets and brokers. Cryptocurrencies often require higher margins than forex pairs, for example, due to their volatility.
What happens if I ignore a margin call?
If you do not respond to a margin call, your broker may automatically close one or more of your positions to bring your account back within margin limits. This could result in realized losses.
Is trading with leverage safe?
While leverage can amplify gains, it also increases risk. It is not suitable for all investors. It is important to have a clear risk management strategy and understand how margin works before trading.