Margin Trading

Margin trading is the practice of using borrowed funds from a broker to trade financial assets, allowing traders to open positions larger than their available capital. The trader deposits a margin — a fraction of the full position value — as collateral. While margin trading can amplify profits, it equally amplifies losses and carries the risk of a margin call.

A trader with $2,000 in their account using 5:1 margin can open a position worth $10,000. If the trade moves in their favour by 5%, the gain is $500 — a 25% return on their actual capital. However, a 5% adverse move would result in a $500 loss, representing 25% of their capital at risk. In a prop trading context, understanding margin requirements is essential, as trading beyond appropriate margin thresholds can quickly accelerate drawdown and put the trader's funded account at risk of termination.