Excess Margin Explained: FX Risk Management for Beginners

1. Introduction

If you have just started FX trading, you may often hear the term “margin”. However, many people may not have a concrete image when they hear “excess margin”. This article will explain in detail from the basic mechanism of excess margin to its importance and how to use it. It also covers risk management essential for success in FX trading. From beginners to intermediate traders, please read through to the end.

2. What is Margin? Let’s Understand the Basic Mechanism

Basic Types of Margin

There are several types of margin, and it is essential to understand the role of each.

• Deposited Margin
  It refers to the funds that investors deposit with an FX company. These funds serve as the capital for trading.
• Required Margin
  It is the minimum amount of capital needed to open a new position. The amount varies depending on the trade volume, currency pair, and leverage.
• Effective Margin
  It is the amount of deposited margin adjusted for unrealized profit and loss. It fluctuates depending on whether the current position is in profit or loss.
• Excess Margin
  It is the remaining amount after subtracting the required margin from the effective margin. The larger this amount, the more room there is to open new trades.

How Margin Works

For example, if you deposit 100,000 yen into an FX account and purchase 10,000 dollars (1,000,000 yen) when 1 dollar equals 100 yen, the required margin would be 100,000 yen with 10× leverage. After the trade, if the market moves, the effective margin fluctuates, and the excess margin changes accordingly.

3. What is Excess Margin? Calculation Method and Example

Calculation Method

You can calculate excess margin using the following formula.

Excess Margin = Effective Margin - Required Margin

Calculation Example

Let’s look at a concrete example.

1. Deposit Margin: 1,000,000 yen
2. P&L: +100,000 yen
3. Swap P&L: -50,000 yen
4. Required Margin: 500,000 yen

In this case, the effective margin is calculated as follows:

Effective Margin = Deposit Margin + P&L + Swap P&L = 1,000,000 yen + 100,000 yen - 50,000 yen = 1,050,000 yen

Next, calculate the excess margin.

Excess Margin = Effective Margin - Required Margin = 1,050,000 yen - 500,000 yen = 550,000 yen

In this example, the excess margin is 550,000 yen, which provides the capacity for new trades.

4. Importance and Role of Excess Margin

Securing Trading Capacity

The greater the excess margin, the more capital you have available to open new positions. This enables you to trade without missing market opportunities.

Avoiding Loss-Cut Risk

When excess margin is low, the risk of a loss-cut (forced liquidation) being triggered by sudden market movements increases. Therefore, it is important to adequately secure excess margin.

Psychological Stability

Having sufficient excess margin reduces anxiety and stress related to trading. This allows for calmer decision-making.

5. Specific methods to increase excess margin

Adding funds to margin

The simplest and most direct way is to deposit additional funds into your FX account.

• Benefits:
  By increasing excess margin, you reduce the risk of a stop‑loss and create room for new trades.
• Considerations:
  This method is only suitable if you have extra financial capacity; avoid forcing deposits you can’t afford.

Reviewing position size

By reviewing your current positions and reducing trade volume, you can lower the required margin.

• Example:
  Manage risk by limiting leverage and trading in smaller amounts.
• Effect:
  Reducing required margin increases excess margin.

Avoid high leverage

Higher leverage allows larger trades with less margin, but it also increases risk.

• Recommendation for low leverage:
  Setting lower leverage prevents the required margin from becoming too high.

Closing unnecessary positions

By closing positions with large unrealized losses, you can reduce required margin and recover excess margin.

• Case study:
  If market direction diverges significantly from expectations, realize losses to protect capital.

Utilizing automated trading tools

Using automated trading tools allows you to trade appropriately without being swayed by emotions.

• Concrete example:
  Use a tool with risk‑management features to adjust required margin while operating.

6. Relationship Between Excess Margin and Margin Maintenance Ratio

How to Calculate the Margin Maintenance Ratio

Margin Maintenance Ratio indicates how many times the current effective margin exceeds the required margin. It can be calculated using the following formula.

Margin Maintenance Ratio (%) = (Effective Margin ÷ Required Margin) × 100

Importance of the Margin Maintenance Ratio

• When the maintenance ratio is high:
  The risk of a loss cut is low, and there is room to open new positions.
• When the maintenance ratio is low:
  The risk of a loss cut increases, making it difficult to continue trading.

Relationship in Practice

For example, consider the following conditions.

• Effective Margin: 1.2 million yen
• Required Margin: 400,000 yen

In this case, the margin maintenance ratio is calculated as follows:

Margin Maintenance Ratio = (1.2 million yen ÷ 400,000 yen) × 100 = 300%

If the maintenance ratio is 300%, it indicates that there is sufficient excess margin.

7. Summary and Next Steps

Review of the Importance of Excess Margin

• Ensuring Trading Capacity: The more excess margin you have, the easier it is to open new positions and the less likely you are to miss market opportunities.
• Risk Management: Maintaining sufficient excess margin can significantly reduce the risk of a stop‑loss.
• Psychological Stability: Having margin cushion allows for calm trading.

Next Steps

• Review Your Trades: Check your current position sizes and margin maintenance ratios, and aim for trades that are within your limits.
• Deepen Your Knowledge: To further deepen your understanding of excess margin and risk management, use reliable FX books and online seminars.
• Leverage Tools: We also recommend trying automated trading tools and trading platforms with risk‑management features.

Proper management of excess margin is the key to stable profits and long‑term trading success.

8. FAQ: Frequently Asked Questions

Q1: Can excess margin become negative?

A1: Normally, excess margin does not become negative. However, if the effective margin falls below the required margin, a loss cut (forced liquidation) may be triggered. Extra caution is needed especially during sharp market movements.

Q2: What is the difference between required margin and excess margin?

A2: Required margin is the minimum amount of funds needed to hold a position, determined by trade volume and leverage. Excess margin is the amount remaining after subtracting required margin from effective margin, indicating the capacity to open new positions.

Q3: How can you keep the margin maintenance ratio high?

A3: You can keep the margin maintenance ratio high by:

• Settling unnecessary positions to reduce required margin.
• Depositing additional margin.
• Reducing trade volume to lower leverage.

Q4: Is trading safer when excess margin is high?

A4: Yes, having more excess margin enables safer trading. Especially during sharp market movements, you can respond with a cushion, reducing the risk of loss cuts.

Q5: Where can I check excess margin?

A5: In many FX companies, you can check excess margin on the trading platform or account management screen. Since it updates in real time, it’s important to keep track even while trading.

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