he Margin Level is the ratio of your account Equity to the Used Margin, indicated in percentage.
More poetically said, it shows how “healthy” your trading account is.
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 more, the merrier! What is your favorite movie? Judging by the name, this is ours.
If you are going lower at the Margin Level, you could have some troubles that you as a trader DO NOT WANT, such as getting a Margin Call or a Stop Out. We will talk about these troublemakers later.
How to Calculate Margin Level
The formula for calculating Margin Level is:
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.
If you want to open new positions, you will have to close existing positions first.
Let’s see an example:
Open a long USD/CHF position with 1 mini lot
Let’s say you have an account balance of $1,000.
Your step number one will be to calculate the Required Margin!
You want to go long USD/CHF and want to open 1 mini lot (10,000 units) position. The Margin Requirement is 2%.
How much margin (Required Margin) will you need to open the position?
Since USD is the base currency. This mini lot is 10,000 dollars, which means the position’s Notional Value is $10,000.
$200 = $10,000 x 0.02
Assuming your trading account is denominated in USD since the Margin Requirement is 4%, the Required Margin will be $200.
Following step number two – Calculating the Used Margin!
As long as you don’t have any other open trade positions except the last one, your Used Margin will be equal to the Required Margin. We will use this case, so it will be easier for you.
Then you go to step number three – Calculating your Equity
In the best-case scenario, the price has moved slightly in your favor and your position is now trading at breakeven.
This means that your Floating P/L is $0.
Let’s calculate the Equity:
$1,000 = $1,000 + $0
The Equity in your account is now $1,000.
Equity with Breakeven Floating P/L
The last step will be Calculating the Margin Level
Now that we know the Equity, we can now calculate the Margin Level:
250% = ($1,000 / $200) x 100%
The Margin Level is 500%.
Remember that if the Margin Level is 100% or less, this will mean NO MORE TRADES for ya!
In the given example, your current Margin Level is 500% (above 100%), therefore you will be able to open new trades.
If you keep your Margin Level above 100%, everything is gonna be fine!
Let’s quickly revise!
Margin Level is the ratio between Equity and Used Margin.
For example, if your Equity is $5,000 and the Used Margin is $1,000, the Margin Level is 500%.
Balance is the cash you have available in your trading account.
Unrealized and Realized P/L represent how profit or losses affect your account balance.
Required Margin is the amount of money that is blocked when you open a position.
Used Margin is the total amount of margin that’s currently blocked to maintain all open positions.
Equity is your Balance plus the floating profit (or loss) of all your open positions.
Free Margin is the money that is NOT “blocked” due to an open position and can be used to open new positions.