Do you remember all Margin words?
Let’s see.
Here’s a cheat sheet to the most popular terms you will see displayed on your trading platform.
Margin
You want to trade, therefore open a new position. In order to do that you have to put up a small amount of capital, which is called Margin.
For instance, you want to buy $300,000 worth of USD/CHF.
You won’t put up the full amount, you only need to put up a portion, like $5,000.
The actual amount depends on your forex broker or CFD provider.
Margin is a guarantee that your broker needs in case something happens and you lose the trade.
It can be thought of as a good faith deposit or collateral.
Leverage
Leverage gives you the power to trade positions LARGER than the amount of money in your trading account.
Leverage is expressed as a ratio between the amount of money you really have and the amount of money you can trade.
It is usually expressed with an “X:1” format.
Unrealized P/L
Unrealized P/L reflects the profit or loss of all your open positions. It shows the profit or loss you will make if you close all positions at the exact moment.
Another name for Unrealized P/L is “Floating P/L”, and as its name suggests it is because the P/L is constantly “float” (or change) after opening a position.
Balance
The funds that you will deposit in your account are your account balance. This is the total amount of cash you have in your trading account.
Every time you open a new position, your account balance will not be effected until the position is CLOSED.
This means that your Balance can only change in one of THREE ways:
1. When you deposit more funds into your account.
2. When you close a position and your profit or loss will be taken out or added to your account balance.
3. When you keep a position open overnight and either receive or pay a swap/rollover fee.
Margin Requirement (Per Position)
If you want to open a position, you will be asked by your broker to put up a fraction of that position’s value as collateral. In this case, it means that you will be “leveraged”.
Margin Requirement is the amount of margin required to open a position.
This “fraction” part which is expressed in percentage terms is the “Margin Requirement”. For example, 2%.
Required Margin (Per Position)
Required Margin is the amount of money that is blocked when you open a position. It is not a broker’s fee, so when you close the trade, it will be released.
For example, the Margin Requirement is 2%.
2% of a $100,000 position size would be $2,000.
The $2,000 is the Required Margin to open this specific position.
Since you are able to trade a $100,000 position size with just $2,000, your leverage ratio is 50:1.
Leverage = 1 /Margin Requirement
50 = 1 / 0.02
This $2 000 can’t be used to open other positions as long as the trade is open. Once you close the trade, the $2 000 margins will be “released”.
HOW TO CALCULATE (PER POSITION):
- If the base currency is the SAME as your account’s currency:
- If the base currency is DIFFERENT from your account’s currency:
Used Margin
Used Margin is the total amount of margin that’s currently blocked to maintain all open positions.
The position you open at a time has its own Required Margin ( a specific amount that is locked up). Each new position that you have opened next, has its own Required Margin.
Now, add up all of the Required Margin of all the positions that are open in your trading account and the total amount will be your Used Margin.
Used Margin is ALL the margin that’s blocked for the orders that are yet to be executed. It CAN’T be used to open new positions.
HOW TO CALCULATE:
Equity
The account equity or simply “Equity” refers to the current amount of money in your trading account plus or minus any floating profit or loss from open positions.
The Equity is in direct interconnection with the value of your trades, when the value goes up or down, so the Equity follows this fluctuation.
If you don’t have any open trades, your Equity will be equal to your Balance.
If you deposit 5,000, for instance, this will be your balance AND the amount of your Equity. Without open positions, they will be the same as each other.
HOW TO CALCULATE:
If you have open positions:
If you do not have any open positions:
Free Margin
Free Margin is the difference between Equity and Used Margin.
In other words, Free Margin is the amount of money that is NOT being tied up in margin for current open positions.
Free Margin can be manifested as “Usable Margin” because these are the funds that are available to you for opening new positions. Therefore you can “use” this margin.
HOW TO CALCULATE:
Margin Level
The Margin Level is the ratio of your account Equity to the Used Margin, indicated in percentage.
It reveals how much of the funds you have at your disposal for opening new trades.
The higher the Margin Level, the more Free Margin you have available to trade.
The formula for calculating Margin Level is:
For example, if your Equity is $5,000 and the Used Margin is $1,000, the Margin Level is 500%.
It is automatically calculated and displayed on your trading platform.
If you don’t have any trades open, your Margin Level will be ZERO.
Different brokers set different Margin Level limits, but most brokers set this limit at 100%.
When you reach this level and your Equity is equal to or less than your Used Margin, your broker WILL NOT allow you to open any new positions.
Margin Call Level
Your broker sets a threshold (“Margin Call Level”), which is represented in percentages (usually it is 100%). Reaching this level leads to triggering a “Margin Call”.
After reaching this Margin Call level, you are in jeopardy of being forced to liquidate all your positions.
The margin call level represents a specific value of the metric.
Don’t confuse Margin Call level and Margin Call.
The “Margin Call” is the EVENT. When it does happen, you will receive a notification that the Margin Level fell below a certain value (Margin Call Level).
A Margin Call Level is just a WARNING.
For example, if the Margin Call Level is 100%, this means that if your Margin Level reaches 100%, you won’t be able to open any new positions. At this point, your account is now under a Margin Call.
Formula:
Stop Out Level
When your Margin Level falls below a specific percentage level, you have reached the Stop Out Level and one or all of your open positions will be closed automatically (“liquidated”) by your broker because you can no longer support the open positions due to a lack of margin.
The broker starts closing out the trades, which are the most unprofitable ones in order to prevent your account from suffering further losses.
For example, if your forex broker has a Stop Out Level at 20%, your trading platform will automatically close your position if your Margin Level reaches 20%.
Stop Out Level = Margin Level at 20%
Let’s say that you already got a Margin Call when the Margin Level had reached 100% but still decide not to deposit more funds because you think the market will turn.
However, the market continues to fall. Your Margin Level is now 20%.
Your position will be automatically “liquidated”.
When this happens, the Used Margin (that was blocked) will be released and it will become Free Margin.
Formula:
Margin Call
As we said, the “Margin Call” is the EVENT. When your Margin Level fell below a certain value (Margin Call Level), but it is above the Stop Out Level.
You will be allowed to keep your positions, but you can’t open new ones.
Every retail forex broker and CFD provider decides if they want to operate only with Margin Calls or both Margin Calls and Stop Out Levels.
If they operate with both, the Margin Call will be a WARNING that you are close to having your open positions liquidated at market price.
Stop Out
This act of closing your positions is called a Stop Out.
It occurs when the Stop Out Level limit has been crossed and that’s why your open positions will be automatically closed (“liquidated”) to prevent a negative account balance.
