Variation Margin Definition. A Variation Margin has two meanings in forex trading. It commonly refers to an amount that a forex broker may request from you, if you are utilizing margin or leverage, in order to return your account to his initial margin requirements. The term can also be used to describe the net unrealized gain or loss for an Option or Futures contract. However, in the leverage context, your broker will require you to deposit both an initial and a maintenance amount. Maintenance refers to the minimum margin or leverage ratio that establishes a level that account balances must satisfy while margin or leverage is in use. It is a precautionary measure to mitigate the broker’s and forex trader’s risk. If account balances fall below this level, the trader will receive a margin call asking for more funds on deposit or instructions to liquidate securities in order to return the account to an acceptable status. The maintenance requirement is the minimum amount to be collateralized in order to keep an open position. It is generally lower than the initial margin deposit requirement. This allows the price to move against the margin without forcing a margin call immediately after the initial transaction. On positions determined to be especially risky, however, the regulators, the exchange, or the broker may set the maintenance requirement higher than normal or equal to the initial requirement to reduce their exposure to the risk accepted by the trader. A maintenance level is lower than the broker’s liquidation level. At that point, the broker will automatically unwind positions to mitigate his risk of default.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.