Definition:
Margin is a key part of leveraged trading. It is the term used to describe the initial deposit you put up to open and maintain a leveraged position. When you are trading forex with margin, remember that your margin requirement will change depending on your broker, and how large your trade size is.
The amount of leverage the broker allows determines the amount of margin that you must maintain. Leverage is inversely proportional to margin, summarized by the following 2 formulas:
Margin = 1/Leverage
Example:
- A 100:1 leverage ratio yields a margin percentage of 1/100 = 0.01 = 1%. A 20:1 ratio = 1/20 = 0.2 = 20%.
Leverage = 1/Margin = 100/Margin Percentage
Example:
- If the margin is 0.01, then the margin percentage is 1%, and leverage = 1/0.01 = 100/1 = 100.
Calculating Margin Requirements for a Trade and the Remaining Account Equity:
Margin Requirement = Current Price × Units Traded × Margin
Example:
- You want to buy 100,000 Euros (EUR) with a current price of 1.35 USD, and your broker requires a 2% margin.
Required Margin = 100,000 × 1.35 × 0.02 = $2,700.00 USD.
- Before this purchase, you had $3,000 in your account. How many more Euros could you buy?
Remaining Equity = $3,000 – $2,700 = $300
- Since your leverage is 100, you can buy an additional $30,000 ($300 × 100) worth of Euros:
30,000 / 1.35 ≈ 22,222 EUR
- To verify, note that if you had used all of your margin in your initial purchase, then, since $3,000 gives you $300,000 ($3,000 inital deposit x 100 leverage) of buying power:
Total Euros Purchased with $300,000 USD = 300,000 / 1.35 ≈ 222,222 EUR
What is Margin Level?
The Margin Level is the percentage (%) value based on the amount of Equity versus Used Margin.
Margin Level allows you to know how much of your funds are available for new trades.
The higher the Margin Level, the more Free Margin you have available to trade. If you don’t have any trades open, your Margin Level will be ZERO.
Margin Level = (Equity / Used Margin) x 100%
What is Margin Call Level vs Margin Call?
A margin call is a term used to describe the alert sent to a trader to notify them that the capital in their account has fallen below the minimum amount needed to keep a position open.
A margin call can mean that the trader has to put up additional funds to balance the account, or close positions to reduce the maintenance margin required.
A “Margin Call Level” is a threshold set by your broker that will trigger a “Margin Call”.
A Margin Call Level at 100% means that your Equity is equal to or lower than your Used Margin.
For example:
- If your forex broker has a Margin Call Level at 100%.
Margin Call Level = Margin Level at 100%
- Let’s say you have a $1,000 account and you open a EUR/USD position with 1 mini lot (10,000 units) that has a $200 Required Margin.
- Since you only have one position open, Used Margin will also be $200 (same as Required Margin).
- Your account now is down 800 pips. At $1/pip, this means you have a floating loss of $800!
- This means your Equity is now $200 = balance + Floating P/L (+ profit/ – loss) = $1,000 – $800
- Margin level = 100% = ($200/$200) x 100%. It means you will NOT be able to open any new positions unless:
– The market reverses back as your expectation/prediction or;
– You Deposit more funds into your account or;
– You Close out existing positions.
Read What is pip?
Read What is spread?
