We usually pay some money just to buy something. In the same way, the forex market is defined to make a process to settle two days in arrear to the trade date. This is so called OTC spot trading. On the other hand, we don't have to pay full amount in the forex margin trading and we are required to pay or receive the translation gains or losses when the position are made square. Here, a problem may happen. If the losses by a certain investor expand further and he got fallen default to pay any more, what is happening? Such trading system would be forced to fail to keep working.
The margin requirement is defined as the deposit necessary for some collateral in order to solve such kind of problem. The forex margin trading turns out to be very efficient in the fund usage, and the forex margin trading requires one of tenth or one of twentieth as much money as the actual face value you would try to trade, although you might feel strange.
The name of margin which means "proof" in Japanese, should come from where investors must show money as proof to keep trading in former days. There are various types of the margin, the initial margin, the margin requirement and the maintenance margin. The beginner might feel unfamiliar to those terminologies.
Initial margin and the inception requirement
The initial margin is a deposit required in advance to trade forex, which is at least necessary to start forex margin trading. You might take a look at the phrase in some advertisements, "You need some Japanese Yen for opening your account". This just stands for the lowest level of the margin requirement at inception.
The margin requirement is the key point in the forex margin trading. That stands for the deposit required in advance to take some positions. This amount determines the leverage ratio. Assuming that you should take 0.1 million USD position that is almost equivalent to 12 million JPY, the leverage itself differs from each other whether 0.1 million JPY is required or 0.2 million for the margin requirement. Needless to say that the fewer amount of margin requirement results in the higher leverage you can enjoy.
The maintenance margin is the most important for the forex margin trading. When the revaluation losses exceed and the account balance reduces below the maintenance margin, the automatic loss cut system is executed and your position is made clear. Under the margin call system, some more additional margin is called on at that time. Please keep in your mind that the maintenance margin is set up by each forex broker to allow investors to keep their position.