Basics of Risk Management and Margin
FX (Foreign Exchange Margin Trading) is an attractive method of trading that allows you to move large amounts of money with relatively small capital through “leverage.” However, this also means that the potential losses can be significant.
You often see posts online saying “I lost a lot in FX” or “My position was force-closed,” but most of these cases result from a lack of proper understanding of risk management and the mechanism of margin.
This article explains in simple terms the basic knowledge needed to minimize risk and the mechanism of maintaining margin for beginners and those planning to start trading FX.
■ 1. What Are the Risks in FX? Let’s Start from the Basics
There are multiple risks involved in FX trading. Understanding not just vaguely that “you might lose money,” but specifically what kinds of risks exist, is the first step in risk management.
Main Risks in FX Trading
| Type of Risk | Description |
| Price Fluctuation Risk | Losses occur when the exchange rate moves in the opposite direction of your prediction. |
| Leverage Risk | While leverage allows large trades with small capital, it also amplifies potential losses. |
| Loss-Cut Risk | If your margin maintenance rate falls below a certain level, your position will be force-closed. |
| Liquidity Risk | In volatile markets, prices can move drastically, making it difficult to execute orders at the desired price. |
| System Risk | Delays or issues caused by communication errors or server downtime. |
Among these, “forced loss-cut due to excessive leverage” is one of the most common mistakes beginners make.
This article explains the mechanism of loss-cuts and forced liquidation in detail, so we recommend reading it together.
■ 2. Understanding the Relationship Between Margin and Leverage
Margin is the collateral you deposit to conduct FX trading. Leverage, on the other hand, represents how many times the margin can be multiplied for trading.
Example: How Leverage Works
- Margin: ¥100,000
- Leverage: 25×
- Tradable amount: ¥100,000 × 25 = ¥2,500,000
This means you can aim for large profits with small capital, but losses can also grow proportionally if the market moves against you.
This is the key point of risk management in FX trading.
■ 3. Mechanism of Margin Maintenance Ratio and Loss-Cut
To continue trading, you must maintain a certain margin maintenance ratio. Falling below this threshold triggers a loss-cut (forced liquidation), locking in your losses.
Margin Maintenance Ratio Formula:
Margin Maintenance Ratio (%) = Effective Margin ÷ Required Margin × 100
For example:
- Effective Margin: ¥40,000
- Required Margin: ¥50,000
- Maintenance Ratio = 40,000 ÷ 50,000 × 100 = 80%
By always being aware of this ratio, you can avoid the risk of forced liquidation due to sudden losses.
Most domestic FX brokers execute a loss-cut when the margin maintenance ratio falls below 50%.
Overseas FX brokers such as EC Markets adopt a zero-cut system, which prevents losses beyond your deposit amount.
■ 4. Five Basic Rules to Minimize Risk
To succeed in FX trading, you need more than just market predictions — you must systematize your risk management. By following these key points, you can significantly reduce your loss risk.
Five Principles of Risk Management
- Set leverage low (recommended under 5×)
- Risk only 1–2% of your capital per trade
- Always set a stop-loss line (stop-loss order)
- Do not take oversized positions relative to your funds
- Avoid trading during major announcements or speeches
In particular, “leaving trades open without setting a stop-loss” is one of the most dangerous actions in FX.
■ 5. How to Cut Losses and Let Profits Run
The essence of risk management lies in “controlling losses, not winning every trade.”
It is crucial to maintain a mindset of “small losses, large profits” with a risk-to-reward ratio of at least 1:2.
Example: Risk-Reward Ratio
- Stop-loss: −50 pips
- Take-profit: +100 pips
- Even with a 50% win rate, your capital continues to grow
Designing your plan in advance and sticking to your rules helps prevent emotional decisions and leads to more stable FX trading.
■ Summary | Protecting Your Capital Is the First Step in FX
FX offers opportunities to grow your capital in a short period, but underestimating risk can also wipe out your funds instantly.
Therefore, the key to success is not “avoiding risk,” but “trading while being able to manage risk.”
Understanding the mechanism and maintenance ratio of margin is the foundation of this approach.
Don’t trade “on a whim,” but trade “based on calculated rules.”
This approach will protect and steadily grow your assets.
Start developing your risk management habits today to make your FX trading safer and more stable.