What is margin level in forex

What is meant by "Margin Level"? The margin level is a value expressed as a percentage (percent) based on the ratio of available equity to available margin.

August 02, 2022 - 03:04 PM 295 views

What is margin level in forex

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What is meant by "Margin Level"?

The margin level is a value expressed as a percentage (percent) based on the ratio of available equity to available margin.

You can determine how much of your money is accessible for fresh trades by checking your margin level.

The more Free Margin you have available to trade, the higher the Margin Level.

Less Free Margin is available to trade when the margin level is decreasing, which could have highly negative consequences like a Stop Out or Margin Call (which will be discussed later).

Methods for Determining Margin Level

How to Calculate Margin Level is as follows:

Margin Level = (Equity / Used Margin) x 100%

Your Margin Level will be calculated and displayed automatically by your trading platform.

Your margin level will be ZERO if you have no open deals.

The Margin Level is crucial. Margin levels are used by forex brokers to decide if you can open more trades.

Although different brokers set their own margin level restrictions, most set this maximum at 100%.

This means that you won't be able to create any new positions while your equity is equal to or less than your used margin.

You must first close any open jobs before opening any new ones.

Example #1: Start a long position in the USD/JPY with 1 mini lot.

Let's imagine you have a $1,000 balance in your account.


Step 1: Determine the needed margin

You want to start a position trading 1 mini lot (10,000 units) of USD/JPY long. The minimum required margin is 4%.

How much required margin (margin needed) will you require to open the position?

Because the base currency is the USD. The Notional Value of the position is $10,000 because this tiny lot is worth $10,000.

Required Margin = Notional Value x Margin Requirement

$400 = $10,000 x .04

Given that the margin requirement is 4% and your trading account is USD-denominated, your required margin will be $400.


Calculate the Used Margin in Step 2

There are no open trades other than the one we just entered.

The Used Margin will match the Required Margin because we only have one open position.


Calculate equity in Step 3

Assume that the price has changed marginally in your favour, bringing your position's price to breakeven.

As a result, your floating P/L is zero.

Let's figure out the equity:

Equity = Account Balance + Floating Profits (or Losses)

$1,000 = $1,000 + $0

Your account now has $1,000 in equity.

Calculate the margin level in Step 4

We can determine the margin level now that we know the equity:

Margin Level = (Equity / Used Margin) x 100%

250% = ($1,000 / $400) x 100%

250 percent represents the margin level.

Most trading systems won't let you open fresh trades if the margin level is 100 percent or below.

You can still open fresh trades in the example because your current Margin Level is 250 percent, which is significantly higher than 100 percent.

Your account is free to start opening new transactions as long as the margin level is more than 100%.

Recap

We learned the following in this lesson:

The proportion of equity to used margin is known as the margin level. It has a percentage format ( percent ).

For instance, the margin level is 500 percent if your equity is $5,000 and your used margin is $1,000.

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