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6. Margin Trading 101

How to Avoid a Margin Call

Trading on margin is a way for traders with limited capital to make significant profits (or losses).

If you fail to understand the concept of margin or not knowing what to do when faced with a margin call from your broker, you will definitely experience the shock of your trading account blow up.

Here are five ways to avoid a margin call.

1. Know WTF a margin call is.

Understanding what margin call is and how it works is the first step in knowing how to avoid one.Most new traders want to focus on other details of trading such as technical indicators or chart patterns, but little thought is given to the other important elements such as margin requirements, equity, used margin, free margin, and margin levels.

If you’re hit with a margin call out of the blue, this usually means you have no clue what causes a margin call and are opening trades without considering margin requirements.

If this is you, you are doomed to fail as a trader. Guaranteed.

A margin call occurs when your account’s Margin Level has fallen below the required minimum level. At this point, your broker will notify you and demand that you deposit more money in your account to meet the minimum margin requirements.

Nowadays, this process is automated so your broker will probably notify you by email or text rather than receiving an actual phone call.

2. Know what the margin requirements are even before you place ANY order.

Knowing the margin requirements BEFORE you open a trade is crucial.The concept of margin call isn’t thought about much by most traders, especially when they are placing pending orders with their broker.

Typically, traders tend to place an order with their broker and it remains open until the limit price is reached or until the pending order expires.

When you place a pending order, your trading account is not affected because margin is not applied to pending orders.

However, this exposes you to the risk of the pending order being automatically filled.If you’re not properly monitoring your margin level, when this order gets filled, it could result in a margin call.

In order to avoid such a situation, you need to consider margin requirements before placing an order.

You have to account for the margin amount that will be deducted from your free margin, as well as having some additional margin so your trade will have some breathing room.

When you have multiple pending orders open, it can get quite confusing and if you’re not careful, these orders could result in a margin call.

To avoid such a tragedy , it’s crucial that you understand the margin requirements for each position you plan to enter.

3. Use stop loss orders or trailing stops to avoid margin calls.

If you don’t know what a stop loss order is, you’re on your way to losing a lot of money.

As a refresher though, a stop loss order is basically a stop order sent to the broker as a pending order. This order is triggered when price moves against your trade.For example, if you were long 1 mini lot on USD/JPY at 110.50, and you set your stop loss at 109.50.

This means that when USD/JPY falls to 109.50, your stop order is triggered and your long position is closed for a loss of 100 pips or $100.

If you traded WITHOUT a stop loss order and USDJPY continued to fall, at some point, depending on how much money you have in your account, you would trigger a margin call.

A stop loss order or a trailing stop order prevents you from taking on further losses, which helps prevent getting a margin call.

4. Scale in positions rather than entering all at once.

Another reason why some traders end up with a margin call is because they misjudge price movement.

For example, you think GBP/USD has gone up way too high and too fast and you believe that there is no way price can go higher, so you open a HUGE short position.

This type of overconfident trading increases the probability of triggering a margin call.

To avoid this, one approach is to build a trade position, also known as “scaling in”.

Instead of trading with 4 mini lots right off the bat, start off with 1 mini lot. Then add or “scale in” to the position as the price moves in your favor.While you continue adding new positions, you can also start moving the stop losses on the previous positions to reduce potential losses or even even lock in profits.

Position scaling can help you magnify your profits while trading risk-free when you combine all the positions.

While this usually means that you’ll have to allocate more capital towards the larger margin requirement, scaling in positions at different price levels and using different stop loss levels means that your risk of losses on the trade are spread out which lowers the probability of a margin call (when compared to opening one big position size all at once).

5. Know WTH you are doing as a trader.

It’s not uncommon to hear about noob traders who are hit with a margin call and don’t know what the hell happened.

These traders are the types of traders who are just focused on how much money they can make and don’t know what the hell they are doing and don’t fully understand the risks of trading.

Don’t be that trader.

Risk management should be your main priority, not profits.

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6. Margin Trading 101

Margin Jargon Cheat Sheet

As you dive into the world of margin trading, it may feel like you have to learn an entirely new language to truly understand what’s going on.

Just as with any specialized area, margin trading comes with its own terminology and jargon.

Here’s a handy cheat sheet to the most common terms you may come across in your trading platform.

Want a printable version?
Here’s a PDF version of the cheat sheet below that you can download and print.

Margin

DEFINITION:

Margin is the amount of money you are required to deposit with your trading platform in order to order and maintain positions in the forex market. Margin is used as collateral to ensure you can cover any losses you might incur on your positions.

Leverage

DEFINITION:

Leverage is the ability to trade a larger amount with a much smaller amount in your account.

Unrealized P/L

DEFINITION:

Unrealized P/L is the current profit or loss (P/L) held in your open positions.

ALSO CALLED:

  • Floating P/L

Balance

DEFINITION:

Balance is the total amount of cash you have in your trading account. If you have an open position, even if it has a floating profit (or loss), your Balance is still the same as before you opened the position. But once you close the position, the profit (or loss) will be added (or deducted) from the Balance and this will be your new Balance.

ALSO CALLED:

  • Account Balance
  • Cash

Margin Requirement (Per Position)

DEFINITION:

Margin Requirement is the amount of margin required to open a position. It is expressed as a percentage (%) of the “full position” size or “Notional Value” of the position you wish to open.

Required Margin (Per Position)

DEFINITION:

Required Margin is the money that is set aside and “locked up” when you open a trade.

For example, if you open a $10,000 (mini lot) position, with a Required Margin of 2% (or 50:1 leverage), $200 will be “locked up” during the duration of the trade.

This $200 can’t be used to open other positions as long as the trade is open. Once you close the trade, the $200 margin will be “released”.

ALSO CALLED:

  • Entry Margin
  • Initial Margin
  • Initial Entry Margin
  • Maintenance Margin Required (MMR)

HOW TO CALCULATE (PER POSITION):

If the base currency is the SAME as your account’s currency:

Required Margin = Notional Value x Margin Requirement

If the base currency is DIFFERENT from your account’s currency:

Required Margin = Notional Value x Margin Requirement 
x Exchange Rate Between Base Currency and Account Current

Used Margin

DEFINITION:

Used Margin is the minimum amount of Equity that must be maintained in a margin account. This is the total amount of margin currently in use to maintain open positions.

ALSO CALLED:

  • Margin Used
  • Maintenance Margin Required (MMR)
  • “Total Margin”

HOW TO CALCULATE:

Used Margin is simply the Required Margin for ALL open positions.

Used Margin = Total Required Margin for ALL Open Positions

Equity

DEFINITION:

Equity is your account balance plus the floating profit (or loss) of all your open positions. Represents the “real-time” value of your account.

ALSO CALLED:

  • Account Equity
  • Net Asset Value
  • Net Equity

HOW TO CALCULATE:

If you have open positions:

Equity = Balance + Floating Profit (or Loss)

If you do not have any open positions:

Equity = Balance

Free Margin

DEFINITION:

Free Margin is the money that is NOT “locked up” due to an open position and can be used to open new positions. When this value is at zero or less the Margin Warning is triggered and additional positions cannot be opened.

ALSO CALLED:

  • Free Margin
  • Available Margin
  • Usable Margin
  • Usable Maintenance Margin
  • “Available to Trade”

HOW TO CALCULATE:

Free Margin = Equity - Used Margin

Margin Level

DEFINITION:

Margin Level is the ratio between Equity and Used Margin. It is expressed as a percentage. For example, if your Equity is $5,000 and the Used Margin is $1,000, the Margin Level is 500%.

ALSO CALLED:

  • Margin Indicator

HOW TO CALCULATE:

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

Margin Call Level

DEFINITION:

The Margin Call Level is the specific level (%) where if your margin level is equal or below it, you won’t be able to open any new positions. Your trading platform determines the Margin Call Level.

For example, if the Margin Call Level is 100%, this means that if your Margin Level reaches 100%, you won’t be open any new positions. At this point, your account is now under a Margin Call.

Even though most new traders assume this means that their trade(s) may be closed, that’s not true. A Margin Call Level is just a WARNING.

ALSO CALLED:

  • Minimum Margin Requirement
  • Minimum Required Margin

HOW TO CALCULATE:

Margin Call Level = Margin Level at X%

Stop Out Level

DEFINITION:

The Stop Out Level is the specific level (%) where if your Margin Level is equal or below it, your broker will automatically start closing your positions until the Margin Level is greater than the Stop Out LevelFor example, let’s say the Stop Out Level is 50%.

This means that if the Margin Level falls below 50% a Stop Out will automatically occur and the position floating the largest loss will be liquidated automatically.

This process will be repeated until the Margin Level increases to a level above 50%.

ALSO CALLED:

  • Liquidation Margin
  • Margin Closeout
  • Margin Close Out (MCO)
  • Minimum Required Margin

HOW TO CALCULATE:

Stop Out Level = Margin Level at X%

Margin Call

DEFINITION:

Margin Call occurs when you have breached the Margin Call Level but still above the Stop Out Level.

A Margin Call, is a WARNING, telling you that your account isn’t doing too well and that you are close to having your open positions liquidated at market price.

You are still allowed to keep your current positions open but you can’t open new positions.

Stop Out

DEFINITION:

Stop Out, which happens once the Stop Out Level has been breached, is when your open positions will be automatically closed (“liquidated”) to prevent a negative account balance.

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6. Margin Trading 101

The Relationship Between Margin and Leverage

What is the relationship between Margin and Leverage?

You use margin to create leverage.

Leverage is the increased “trading power” that is available when using a margin account.

Leverage allows you to trade positions LARGER than the amount of money in your trading account.

Leverage is expressed as a ratio.

Leverage is the 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.

For example, if you wanted to trade 1 standard lot of USD/JPY without margin, you would need $100,000 in your account.

But with a Margin Requirement of just 1%, you would only have to deposit $1,000 in your account.

The leverage provided for this trade would be 100:1.

Here are examples of Leverage Ratios depending on the Margin Requirement:

Currency PairMargin RequirementLeverage Ratio
EUR/USD2%50:1
GBP/USD5%20:1
USD/JPY4%25:1
EUR/AUD3%33:1

Here’s how to calculate Leverage:

Leverage = 1 / Margin Requirement

For example, if the Margin Requirement is 2%, here’s how to calculate leverage:

50 = 1 / .02

The leverage is 50, which is expressed as a ratio, 50:1

Here’s how to calculate the Margin Requirement based on the Leverage Ratio:

Margin Requirement = 1 / Leverage Ratio

For example, if the Leverage Ratio is 100:1, here’s how to calculate the Margin Requirement.

0.01 = 1 / 100

The Margin Requirement is 0.01 or 1%.

As you can see, leverage has an inverse relationship to margin.

“Leverage” and “margin” refer to the same concept, just from a slightly different angle.When a trader opens a position, they are required to put up a fraction of that position’s value “in good faith”. In this case, the trader is said to be “leveraged”.

The “fraction” part which is expressed in percentage terms is known as the “Margin Requirement”. For example, 2%.

The actual amount that is required to be put up is known as the “Required Margin”.

For example, 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
Margin vs. Leverage

Forex Margin vs. Securities Margin

Forex margin and securities margin are two very different things. Understanding the difference is important.

In the securities world, margin is the money you borrow as a partial down payment, usually up to 50% of the purchase price, to buy and own a stock, bond, or ETF.

This practice is often referred to as “buying on margin”.

So if you’re trading stocks on margin, you’re borrowing money from your stock broker to purchase stock. Basically, a loan from the brokerage firm.

In the forex market, margin is the amount of money that you must deposit and keep on hand with your trading platform when you open a position.

It is NOT a down payment and you do NOT own the underlying currency pair.

Margin can be looked at as a good faith deposit or collateral that’s used to ensure each party (buyer and seller) can meet their obligations of the agreement.

Unlike margin in stock trading, margin in forex trading is not borrowed money.

When trading forex, nothing is actually being bought or sold, only the agreement (or contract) to buy or sell are exchanged, so borrowing is not needed.

The term “margin” is used across multiple financial markets. However, there is a difference between how margin is used when trading securities versus when trading forex. Understanding this difference is essential prior to trading forex.

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6. Margin Trading 101

Different Forex Brokers Have Different Margin Call and Stop Out Levels

Each retail forex broker or CFD provider sets their own Margin Call Level and Stop Out Level.

It’s crucial to know what your broker’s Margin Call and Stop Out Levels are!

A lot of traders don’t even bother to find out what they are before opening their account, they just jump right into trading!

These levels are frequently ignored or overlooked by traders to the detriment of their account!

Different forex brokers handle a Margin Call in different ways.

Some brokers treat a Margin Call and Stop Out as one and the same, meaning they will not send you a warning message, they will simply just start closing your trades along with a message notifying you of the action!

For example, a broker may set their Margin Call Level at 100% with no separate Stop Out Level.

This means that if your Margin Level drops lower than 100%. the broker will automatically close your position without any warnings!

Other brokers treat a Margin Call and Stop Out differently. They use a Margin Call as a sort of an early warning message that your positions are at risk of being liquidated Stop Out).For example, a broker may set their Margin Call Level at 100% and their Stop Out Level at 20%.

This means that if your Margin Level drops lower than 100%, you will receive a WARNING from your broker that you need to close your trade or deposit more money or risk reaching the Stop Out Level.If your Margin Level continues to drop and reaches 20%, then and only then, will the broker automatically close your position (at the best available price).

Depending on the broker, a “Margin Call” can be one of two things:

  • If there is a separate Stop Out, your broker sends you a warning that your account equity has dropped below the required Margin Level percentage, There is no Equity to support your open positions any further.
  • If there is no separate Stop Out, your broker automatically closes your trades, starting from the least profitable one until the required Margin Level is met.

If you receive a Margin Call, and don’t know your fate, here’s a diagram to help you know what will happen to your trade(s). Margin Call FlowchartWhen there is a separate Margin Call and Stop Out Level, think of the Margin Call as a “warning shot” and the Stop Out as the automated action to minimize the chance of your account resulting in a negative balance.Since you get a “warning shot”, this gives traders more time to manage their positions before the automatic liquidation of those positions occurs.

This is different from the traditional margin call policy where the Margin Call and Stop Out Level are one and the same. No “warning shot” is given. You simply just get “shot” (automatic liquidation).

In the end, it is ultimately YOUR responsibility to ensure that your account meets the margin requirements and in the event that if it is not met, your broker has the right to liquidate (“Stop Out”) any or all your open positions.

With a solid understanding of margin trading and the use of stop losses, proper position sizing, and risk management, a Stop Out can be easily prevented.

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6. Margin Trading 101

Trading Scenario: What Happens If You Trade With Just $100?

What happens if you open a trading account with just $100?

Or €100? Or £100?

Since margin trading allows you to open trades with just a small amount of money, it’s certainly possible to start trading forex with a $100 deposit.

But should you?

Let’s see what can happen if you do.

In this trading scenario, your retail forex broker has a Margin Call Level at 100% and a Stop Out Level at 20%.

Now that we know what the Margin Call and Stop Out Levels are, let’s find out if trading with $100 is doable.

If you have not read our lessons on Margin Call and Stop Out Levels, hit pause on this lesson and start here first!

Step 1: Deposit Funds into Trading Account

Account BalanceSince you’re a big baller shot caller, you deposit $100 into your trading account.

You now have an account balance of $100.

This is how it’d look in your trading account:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$100$100$100

Step 2: Calculate Required Margin

You want to go short EUR/USD at 1.20000 and want to open 5 micro lots (1,000 units x 5) position. The Margin Requirement is 1%.

How much margin (“Required Margin“) will you need to open the position?

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

€1 = $1.20

€1,000 x 5 micro lots = €5,000 

€5,000 = $6,000

The Notional Value is $6,000.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$60 = $6,000 x .01

Assuming your trading account is denominated in USD, since the Margin Requirement is 1%, the Required Margin will be $60.

Step 3: Calculate Used Margin

Aside from the trade we just entered, there aren’t any other trades open.

Since we just have a SINGLE position open, the Used Margin will be the same as Required Margin.

Step 4: Calculate Equity

Let’s assume that 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 your Equity:

Equity = Balance + Floating Profits (or Losses)

$100 = $100 + $0

The Equity in your account is now $100.

Step 5: Calculate Free Margin

Now that we know the Equity, we can now calculate the Free Margin:

Free Margin = Equity - Used Margin

$40 = $100 - $60

The Free Margin is $40.

Step 6: Calculate Margin Level

Now that we know the Equity, we can now calculate the Margin Level:

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

167% = ($100 / 60) x 100%

The Margin Level is 167%.At this point, this is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$100$100
ShortEUR/USD6,0001.200001.20000167%$100$60$40$100$0

EUR/USD rises 80 pips!

EUR/USD rises 80 pips and is now trading at 1.2080. Let’s see how your account is affected.

Used Margin

You’ll notice that the Used Margin has changed.

Because the exchange rate has changed, the Notional Value of the position has changed.

This requires recalculating the Required Margin.

Whenever there’s a change in the price for EUR/USD, the Required Margin changes!

With EUR/USD now trading at 1.20800 (instead of 1.20000), let’s see how much Required Margin is needed to keep the position open.

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

€1 = $1.2080 

€1,000 x 5 micro lots = €5,000  

€5,000 = $6,040

The Notional Value is $6,040.

Previously, the Notional Value was $6,000. Since EUR/USD has risen, this means that EUR has strengthened. And since your account is denominated in USD, this causes the position’s Notional Value to increase.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$60.40 = $6,040 x .01

Notice that because the Notional Value has increased, so has the Required Margin.

Since the Margin Requirement is 1%, the Required Margin will be $60.40.

Previously, the Required Margin was $60.00 (when EUR/USD was trading at 1.20000).

The Used Margin is updated to reflect changes in Required Margin for every position open.

In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.

Floating P/L

EUR/USD has risen from 1.20000 to 1.2080, a difference of 80 pips.

Since you’re trading micro lots, a 1 pip move equals $0.10 per micro lot.

Your position is 5 micro lots, a 1 pip move equals $0.50.

Since you’re short EUR/USD, this means that you have a Floating Loss of $40.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

$40 = (1.2080 - 1.20000) x 10,000 x $0.50/pip

Equity

Your Equity is now $60.

Equity = Balance + Floating P/L

$60 = $100 + (-$40)

Free Margin

Your Free Margin is now $0.

Free Margin = Equity - Used Margin

-$0.40 = $60 - $60.40

Margin Level

Your Margin Level has decreased to 99%.

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

99% = ($60/ $60.40) x 100%

The Margin Call Level is when Margin Level is 100%.

Your Margin Level is still now below 100%!

At this point, you will receive a  Margin Call, which is a WARNING.

Your positions will remain open BUT…

You will NOT be able to open new positions as long unless the Margin Level rises above 100%.

Account Metrics

This is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$100$100$100
ShortEUR/USD5,0001.200001.20000167%$100$60$40$100$0
ShortEUR/USD5,0001.200001.208099%$60$60.40-$0.40$100-$40

EUR/USD rises another 96 pips!

EUR/USD rises another 96 pips and is now trading at 1.2176.

Used Margin

With EUR/USD now trading at 1.21760 (instead of 1.20800), let’s see how much Required Margin is needed to keep the position open.

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

€1 = $1.21760

€1,000 x 5 micro lots = €5,000  

€5,000 = $6,088

The Notional Value is $6,088.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$60.88 = $6,080 x .01

Notice that because the Notional Value has increased, so has the Required Margin.Since the Margin Requirement is 1%, the Required Margin will be $60.88.

Previously, the Required Margin was $60.40 (when EUR/USD was trading at 1.20800).

The Used Margin is updated to reflect changes in Required Margin for every position open.

In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.

Floating P/L

EUR/USD has now risen from 1.20000 to 1.217600, a difference of 176 pips.

Since you’re trading 5 micro lots, a 1 pip move equals $0.50.

Due to your short position, this means that you have a Floating Loss of $88.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

-$88 = (1.21760 - 1.20000) x 10,000 x $0.50/pip

Equity

Your Equity is now $12.

Equity = Balance + Floating P/L

$12 = $100 + (-$88)

Free Margin

Your Free Margin is now –$48.88.

Free Margin = Equity - Used Margin

-$48.88 = $12 - $60.88

Margin Level

Your Margin Level has decreased to 20%.

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

20% = ($12 / $60.88) x 100%

At this point,  your Margin Level is now below the Stop Out Level!

Account Metrics

This is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$100$100$100
ShortEUR/USD5,0001.200001.20000167%$100$60$40$100$0
ShortEUR/USD5,0001.200001.2080099%$60$60.40-$0.40$100-$40
ShortEUR/USD5,0001.200001.2176020%$12$60.88-$48.88$100-$88

Stop Out!

The Stop Out Level is when the Margin Level falls to 20%.

At this point, your Margin Level reached the Stop Out Level!

Margin Call Bear Face Palm

Your trading platform will automatically execute a Stop Out.

This means that your trade will be automatically closed at market price and two things will happen:

  1. Your Used Margin will be “released”.
  2. Your Floating Loss will be “realized”.

Your Balance will be updated to reflect the Realized Loss.

Now that your account has no open positions and is “flat”, your Free Margin, Equity, and Balance will be the same.

There is no Margin Level or Floating P/L because there are no open positions.

Let’s see how your trading account changed from start to finish.

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$100$10,000$100
ShortEUR/USD5,0001.200001.20000167%$100$60$40$100$0
ShortEUR/USD5,0001.200001.2080099%$60$60.40-$0.40$100-$40
ShortEUR/USD5,0001.200001.2176020%$12$60.88-$48.88$100-$88
$12$12$12

Before the trade, you had $100 in cash.

Now after just a SINGLE TRADE, you’re left with $12!

Not even enough to pay for one month of Netflix!

You’ve lost 88% of your capital.

% Gain/Loss = ((Ending Balance - Starting Balance) / Starting Balance) x 100%

-88% = (($12 - $100) / $100) x 100%

And with EUR/USD moving just 176 pips!

Moving 176 pips is nothing. EUR/USD can easily move that much in a day or two. (See real-time EUR/USD volatility on MarketMilk™)

Congratulations! You just blew your account! 👏

Since your account balance is too low to open any new trades, your trading account is pretty much dead.

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6. Margin Trading 101

Margin Call Level at 100% and Stop Out Level at 50%

Different retail forex brokers and CFD providers have different margin call policies. Some only operate only with Margin Calls, while others define separate Margin Call and Stop Out Levels.

In the previous lesson, we went through a trading scenario where you were using a broker that operated with a Margin Call only.

In this lesson, we will go through a real-life trading scenario where the broker operates with a separate Margin Call Level and Stop Out Level.

The broker defines the Margin Call Level at 100% and the Stop Out Level at 50%.

What happens to your margin account when you’re in a trade that goes terribly wrong?

Let’s go find out!

Margin Call Level 100% Stop Out Level 50%

Step 1: Deposit Funds into Trading Account

Let’s say you deposit $10,000 into your trading account. You now have an account balance of $10,000.

This is how it’d look in your trading account:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$10,000$10,000$10,000

Step 2: Calculate Required Margin

You want to go long GBP/USD at 1.30000 and want to open 1 standard lot (100,000 units) position. The Margin Requirement is 5%.

How much margin (Required Margin) will you need to open the position?

Since our trading account is denominated in USD, we need to convert the value of the GBP to USD to determine the Notional Value of the trade.

£1 = $1.30

£100,000 = $130,000

The Notional Value is $130,000.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$6,500 = $130,000 x .05

Assuming your trading account is denominated in USD, since the Margin Requirement is 5%, the Required Margin will be $6,500.

Step 3: Calculate Used Margin

Aside from the trade we just entered, there aren’t any other trades open.

Since we just have a SINGLE position open, the Used Margin will be the same as Required Margin.

Step 4: Calculate Equity

Let’s assume that 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 your Equity:

Equity = Balance + Floating Profits (or Losses)

$10,000 = $10,000 + $0

The Equity in your account is now $10,000.

Step 5: Calculate Free Margin

Now that we know the Equity, we can now calculate the Free Margin:

Free Margin = Equity - Used Margin

$3,500 = $10,000 - $6,500

The Free Margin is $3,500.

Step 6: Calculate Margin Level

Now that we know the Equity, we can now calculate the Margin Level:

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

154% = ($10,000 / 6,500) x 100%

The Margin Level is 154%.At this point, this is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$10,000$10,000
LongGBP/USD100,0001.300001.30000154%$10,000$6,500$3,500$10,000$0

GBP/USD falls 400 pips!

GBP/USD falls 400 pips and is now trading at 1.26000. 

Let’s see how your account is affected.

Used Margin

You’ll notice that the Used Margin has changed.

Because the exchange rate has changed, the Notional Value of the position has changed.

This requires recalculating the Required Margin.

Whenever there’s a change in the price for GBP/USD, the Required Margin changes.

With GBP/USD now trading at 1.26000 (instead of 1.30000), let’s see how much Required Margin is needed to keep the position open.

Since our trading account is denominated in USD, we need to convert the value of the GBP to USD to determine the Notional Value of the trade.

£1 = $1.26 

£100,000 = $126,000

The Notional Value is $126,000.

Previously, the Notional Value was $130,000. Since GBP/USD has fallen, this means that GBP has weakened. And since your account is denominated in USD, this causes the position’s Notional Value to decrease.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$6300 = $126,000 x .05

Notice that because the Notional Value has decreased, so has the Required Margin.

Since the Margin Requirement is 5%, the Required Margin will be $6,300.

Previously, the Required Margin was $6,500 (when GBP/USD was trading at 1.30000).

The Used Margin is updated to reflect changes in Required Margin for every position open.

In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.

Floating P/L

GBP/USD has fallen from 1.30000 to 1.26000, a difference of 400 pips.

Since you’re trading 1 standard lot, a 1 pip move equals $10.

This means that you have a Floating Loss of $4,000.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

-$4,000 = (1.26000 - 1.30000) x 10,000 x $10/pip

Equity

Your Equity is now $6,000.

Equity = Balance + Floating P/L

$6,000 = $10,000 + (-$4,000)

Free Margin

Your Free Margin is now –$300.

Free Margin = Equity - Used Margin

-$300 = $6,000 - $6,300

Margin Level

Your Margin Level has decreased to 95%.

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

95% = ($6,000 / $6,300) x 100%

The Margin Call Level is when Margin Level is 100%.

Your Margin Level is still now below 100%!

At this point, you will receive a Margin Call!

This is a WARNING that your trade is at risk of being automatically closed.

Your trade will still remain open but you will NOT be able to open new positions as long unless the Margin Level rises above 100%.

Account Metrics

This is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$10,000$10,000$10,000
LongGBP/USD100,0001.300001.30000154%$10,000$6,500$3,500$10,000$0
LongGBP/USD100,0001.300001.2600095%$6,000$6,300-$300$10,000-$4,000

GBP/USD drops another 290 pips!

GBP/USD falls another 290 pips and is now trading at 1.23100.

Used Margin

With GBP/USD now trading at 1.23100 (instead of 1.26000), let’s see how much Required Margin is needed to keep the position open.

Since our trading account is denominated in USD, we need to convert the value of the GBP to USD to determine the Notional Value of the trade.

£1 = $1.23100 

£100,000 = $123,100

The Notional Value is $123,100.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$6,155 = $123,100 x .05

Notice that because the Notional Value has decreased, so has the Required Margin.Since the Margin Requirement is 5%, the Required Margin will be $6,155.

Previously, the Required Margin was $6,300 (when GBP/USD was trading at 1.26000).

The Used Margin is updated to reflect changes in Required Margin for every position open.

In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.

Floating P/L

GBP/USD has now fallen from 1.30000 to 1.23100, a difference of 690 pips.

Since you’re trading 1 standard lot, a 1 pip move equals $10.

This means that you have a Floating Loss of $6,900.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

-$6,900 = (1.23100 - 1.30000) x 10,000 x $10/pip

Equity

Your Equity is now $3,100.

Equity = Balance + Floating P/L

$3,100 = $10,000 + (-$6,900)

Free Margin

Your Free Margin is now –$3,055.

Free Margin = Equity - Used Margin

-$3,055 = $3,100 - $6,155

Margin Level

Your Margin Level has decreased to 50%.

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

50% = ($3,100 / $6,155) x 100%

At this point,  your Margin Level is now below the Stop Out Level!

Account Metrics

This is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$10,000$10,000$10,000
LongGBP/USD100,0001.300001.30000154%$10,000$6,500$3,500$10,000$0
LongGBP/USD100,0001.300001.2600095%$6,000$6,300-$300$10,000-$4,000
LongGBP/USD100,0001.30001.2310050%$3,100$6,155-$3,055$10,00-$6,900

STOP OUT!

The Stop Out Level is when the Margin Level falls to 50%

At this point, your Margin Level reached the Stop Out Level!

Your trading platform will automatically execute a Stop Out.

This means that your trade will be automatically closed at market price.

  1. Your Used Margin will be “released”.
  2. Your Floating Loss will be “realized”.

Your Balance will be updated to reflect the Realized Loss.

Now that your account has no open positions and is “flat”, your Free Margin, Equity, and Balance will be the same.

There is no Margin Level or Floating P/L because there are no open positions.


Let’s see how your trading account changed from start to finish.

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$10,000$10,000$10,000
LongGBP/USD100,0001.300001.30000154%$10,000$6,500$3,500$10,000$0
LongGBP/USD100,0001.300001.2600095%$6,000$6,300-$300$10,000-$4,000
LongGBP/USD100,0001.30001.2310050%$3,100$6,155-$3,055$10,00-$6,900
$3,100$3,100$3,100

Before the trade, you had $10,000 in cash. Now you’re left with $3,100!

You’ve lost 69% of your capital.

% Gain/Loss = ((Ending Balance - Starting Balance) / Starting Balance) x 100%

-69% = (($3,100 - $10,000) / $10,000) x 100%

Some traders suffer a terrible side effect when finding out their trade has been automatically liquidated.

In the next lesson, we provide a different trading scenario where you try to trade forex with just $100.

It’s possible to trade with such an amount, but is it advisable? Find out what happened to the trader who tried.

Categories
6. Margin Trading 101

Margin Call Level at 100% and No Separate Stop Out Level

Let’s now take all the margin jargon you’ve learned from the previous lessons and apply them by looking at trading scenarios with different Margin Call and Stop Out Levels.

Different retail forex brokers and CFD providers have different margin call policies. Some only operate only with Margin Calls, while others define separate Margin Call and Stop Out Levels.

In this lesson, we will go through a real-life trading scenario where you are using a broker that only operates with a Margin Call.

The broker defines its Margin Call Level at 100% and has no separate Stop Out Level.

What happens to your margin account when you’re in a trade that goes terribly wrong?

Let’s go find out!

Classic Margin Call Example

Step 1: Deposit Funds Into Trading Account

Let’s say you have an account balance of $1,000.

This is how it’d look in your trading account:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$1,000$1,000$1,000

Step 2: Calculate Required Margin

You want to go long EUR/USD at 1.15000 and want to open a 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 EUR is the base currency. this mini lot is 10,000 euros, which means the position’s Notional Value is €10,000.

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

$1.15 = €1 

$11,500 = €10,000 

The Notional Value is $11,500.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$230 = $11,500 x .02

Assuming your trading account is denominated in USD, since the Margin Requirement is 2%, the Required Margin will be $230.

Step 3: Calculate Used Margin

Aside from the trade we just entered, there aren’t any other trades open.

Since we just have a SINGLE position open, the Used Margin will be the same as Required Margin.

Step 4: Calculate Equity

Let’s assume that 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 your Equity:

Equity = Balance + Floating Profits (or Losses)

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

The Equity in your account is now $1,000.

Step 5: Calculate Free Margin

Now that we know the Equity, we can now calculate the Free Margin:

Free Margin = Equity - Used Margin

$770 = $1,000 - $230

The Free Margin is $770.

Step 6: Calculate Margin Level

Now that we know the Equity, we can now calculate the Margin Level:

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

435% = ($1,000 / $230) x 100%

The Margin Level is 435%.

At this point, this is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$1,000$1,000
LongEUR/USD10,0001.150001.15000435%$1,000$230$770$1,000$0

EUR/USD drops 500 pips!

There are reports of a zombie outbreak in Paris.

EUR/USD falls 500 pips and is now trading at 1.10000.

Let’s see how your account is affected.

Used Margin

You’ll notice that the Used Margin has changed.

Because the exchange rate has changed, the Notional Value of the position has changed.

This requires recalculating the Required Margin.

Whenever there’s a change in the price for EUR/USD, the Required Margin changes.

With EUR/USD now trading at 1.1000 (instead of 1.15000), let’s see how much Required Margin is needed to keep the position open.

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

$1.10 = €1 

$11,000 = €10,000 

The Notional Value is $11,000.

Previously, the Notional Value was $11,500. Since EUR/USD has fallen, this means that EUR has weakened. And since your account is denominated in USD, this causes the position’s Notional Value to decrease.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$220 = $11,000 x .02

Notice that because the Notional Value has decreased, so has the Required Margin.

Since the Margin Requirement is 2%, the Required Margin will be $220.

Previously, the Required Margin was $230 (when EUR/USD was trading at 1.15000).

The Used Margin is updated to reflect changes in Required Margin for every position open.

In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.

Floating P/L

EUR/USD has fallen from 1.15000 to 1.10000, a difference of 500 pips.

Since you’re trading 1 mini lot, a 1 pip move equals $1.

This means that you have a Floating Loss of $500.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

-$500 = (1.1000 - 1.15000) x 10,000 x $1/pip

Equity

Your Equity is now $500.

Equity = Balance + Floating P/L

$500 = $1,000 + (-$500)

Free Margin

Your Free Margin is now $280.

Free Margin = Equity - Used Margin

$280 = $500 - $220

Margin Level

Your Margin Level has decreased to 227%.

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

227% = ($500 / $220) x 100%

Your Margin Level is still above 100% so all is still well.

Account Metrics

This is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$1,000$1,000$1,000
LongEUR/USD10,0001.150001.15000435%$1,000$230$770$1,000$0
LongEUR/USD10,0001.150001.10000227%$500$220$280$1,000-$500

EUR/USD drops another 288 pips!

EUR/USD falls another 288 pips and is now trading at 1.07120.

Used Margin

With EUR/USD now trading at 1.07120 (instead of 1.10000), let’s see how much Required Margin is needed to keep the position open.

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

$1.07120 = €1 

$10,712 = €10,000 

The Notional Value is $10,712.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$214 = $10,712 x .02

Notice that because the Notional Value has decreased, so has the Required Margin.Since the Margin Requirement is 2%, the Required Margin will be $214.

Previously, the Required Margin was $220 (when EUR/USD was trading at 1.10000).

The Used Margin is updated to reflect changes in Required Margin for every position open.

In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.

Floating P/L

EUR/USD has now fallen from 1.15000 to 1.07120, a difference of 788 pips.

Since you’re trading 1 mini lot, a 1 pip move equals $1.

This means that you have a Floating Loss of $788.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

-$788 = (1.07120 - 1.15000) x 10,000 x $1/pip

Equity

Your Equity is now $212.

Equity = Balance + Floating P/L

$212 = $1,000 + (-$788)

Free Margin

Your Free Margin is now –$2.

Free Margin = Equity - Used Margin

-$2 = $212 - $214

Margin Level

Your Margin Level has decreased to 99%.

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

99% = ($212 / $214) x 100%

At this point,  your Margin Level is now below the Margin Call Level!

Account Metrics

This is how your account metrics would look in your trading platform:

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$1,000$1,000$1,000
LongEUR/USD10,0001.150001.15000435%$1,000$230$770$1,000$0
LongEUR/USD10,0001.150001.10000227%$500$220$280$1,000-$500
LongEUR/USD10,0001.150001.0712099%$212$214-$2$1,000-$788

MARGIN CALL!

Your trading platform will automatically close out your trade!

Two things will happen when your trade is closed:

  1. Your Used Margin will be “released”.
  2. Your Floating Loss will be “realized”.

Your Balance will be updated to reflect the Realized Loss.

Now that your account has no open positions and is “flat”, your Free Margin, Equity, and Balance will be the same.

There is no Margin Level or Floating P/L because there are no open positions.

Let’s see how your trading account changed from start to finish.

Long / ShortFX PairPosition SizeEntry PriceCurrent PriceMargin LevelEquityUsed MarginFree MarginBalanceFloating P/L
$1,000$1,000$1,000
LongEUR/USD10,0001.150001.15000435%$1,000$230$770$1,000$0
LongEUR/USD10,0001.150001.10000227%$500$220$280$1,000-$500
LongEUR/USD10,0001.150001.0712099%$212$214-$2$1,000-$788
$212$212$212

Before the trade, you had $1,000 in cash. Now you’re left with $212!

You’ve lost 79% of your capital.

% Gain/Loss = ((Ending Balance - Starting Balance) / Starting Balance) x 100%

-79% = (($212 - $1,000) / $1,000) x 100%

Some traders suffer a terrible side effect when finding out their trade has been automatically liquidated.

In the next lesson, we provide a different trading scenario where your broker has a separate Margin Call AND Stop Out Level.

Let’s see the difference between happens there versus what happened here.

Categories
6. Margin Trading 101

What is a Stop Out Level?

What does “Stop Out Level” or “Stop Out” mean?

The Stop Out Level is similar to the Margin Call Level, which was covered in the previous lesson, except that it’s much worse!

In forex trading, a Stop Out Level is when your Margin Level falls to a specific percentage (%) level in which one or all of your open positions are closed automatically (“liquidated”) by your broker.

This liquidation happens because the trading account can no longer support the open positions due to a lack of margin.

More specifically, the Stop Out Level is when the Equity is lower than a specific percentage of your Used Margin.

If this level is reached, your broker will automatically start closing out your trades starting with the most unprofitable one until your Margin Level is back above the Stop Out Level. Stop Out Level Diagram

If your Margin Level is at or below the Stop Out Level, the broker will close any or all of your open positions as quickly as possible in order to protect you from possibly incurring further losses.

This act of closing your positions is called a Stop Out.

Keep in mind that a Stop Out is not discretionary. Once the liquidation process has started, it is usually not possible to stop it since the process is automated.

Your broker’s customer support team will probably NOT be able to help you aside from lending an ear while you weep loudly over the phone.

The Stop Out Level is also known as the Margin Closeout Value, Liquidation Margin, or Minimum Required Margin.

Example: Stop Out Level at 20%

Let’s say your forex broker has a Stop Out Level at 20%.

This means that your trading platform will automatically close your position if your Margin Level reaches 20%.

Stop Out Level = Margin Level @ 20%

Let’s continue with the example from the previous lesson, What is a Margin Call Level?

You’ve already received 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.Not only are you a sucky trader, but you’re a crazy trader also. A sucky crazy trader.

Anyways, your sucky crazy self ends up…absolutely WRONG.

The market continues to fall.

You’re now down 960 pips.

At $1/pip, you now have a floating loss of $960!

This means your Equity is now $40.

Equity = Balance + Floating P/L

$40 = $1000 - $960

Your Margin Level is now 20%.

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

20% = ($40 / $200) x 100%

*Used Margin can’t go below $200 because that’s the Required Margin that was needed to open the position in the first place.

Stop Out Level Example

At this point, your position will be automatically closed (“liquidated”).

When your position is closed, the Used Margin that was “locked up” will be released.

It will become Free Margin.

The end result for you will be depressing though.

Your floating loss of $960 will be “realized”, and your new Balance will be $40!

Since you don’t have any open trades, your Equity and Free Margin will also be $40.

Here’s how your account metrics would look like in your trading platform at each Margin Level threshold:

Margin LevelEquityUsed MarginFree MarginBalanceFloating P/L
Margin Call Level100%$200$200$0$1,000-$800
Stop Out Level20%$40$200$0$1,000-$960
Stop Out (Liquidation)$40$40$40

If you experience a Stop Out and see the aftermath in your account, this is how your eyes feel…

If you had multiple positions open, the broker usually closes the least profitable position first.Each position that is closed “releases” Used Margin, which increases your Margin Level.

But if closing this position is still not enough to get back the Margin Level above 20%, your broker will continue to close positions until it does.

The Stop Out Level is meant to prevent you from losing more money than you have deposited.

If your trade continued to keep losing, eventually, you’d have no more money in your account and you’d end up with a negative account balance!

Brokers would prefer not to have to come knocking on your door with a baseball bat to collect the unpaid balance, so a Stop Out is meant to try and… STOP… your Balance from going negative.

What if I have multiple positions open?

The example above covered the scenario with you trading a single position. But what if you had MULTIPLE positions open?

Hmmm.

Sounds like you love gambling so here’s an example of how the liquidation process would work if you had two or more positions open.

Each broker has its own specific liquidation process so be sure to check with yours. BUT this is a popular approach and will at least give you a good idea of what kind of horror you might experience if you’re trading too BIG.

Let’s pretend the Stop Out level is at 100%.

If at any point, the Margin Level drops below 100% of the margin required.. you will experience an AUTO LIQUIDATION of the position that has the largest unrealized loss! 😲

So if you have multiple positions, the open position with the greatest unrealized loss is closed first, followed by the next largest losing position, followed by the next largest losing position, and so on, UNTIL the Margin Level (maintenance margin) is back to 100% or higher.

Liquidation

Depending on the size and unrealized P&L of the open positions, all your open positions could be liquidated in order to meet the margin requirement! 😲😲😲😲😲

Remember, YOU, and YOU alone, are responsible for monitoring your account and making sure you are maintaining the required margin at all times to support your open positions.

You’ve been warned. Don’t be crying to your broker when your position gets auto-liquated.

You can still cry of course. But only in front of a mirror. 😭

Now that we’ve covered all the important metrics that you need to know in your trading platform, let’s take everything you’ve learned so far about margin trading and put it all together using different trading scenarios.

Categories
6. Margin Trading 101

What is a Margin Call Level?

What does “Margin Call Level” or “Margin Call” mean?

In forex trading, the Margin Call Level is when the Margin Level has reached a specific level or threshold.

When this threshold is reached, you are in danger of the POSSIBILITY of having some or all of your positions forcibly closed (or “liquidated“).

The Margin Level is the “metric” and the “Margin Call Level” is a specific “value” of the metric (which is the Margin Level).

Yeah, it’s awkward. But don’t blame us, we’re not the ones who name these things.

For example, some forex brokers have a Margin Call Level of 100%.

Margin Call Level Diagram

In the specific example above,  if the Margin Level in your account falls to 100% or lower, a “Margin Call” will occur.

Not familiar with the concept of Margin Level? Read our lesson, What is Margin Level?

What is a Margin Call?

Margin Call is when your broker notifies you that your Margin Level has fallen below the required minimum level (the “Margin Call Level”).

This notification used to be an actual phone call, but nowadays, it’s usually an email or text message.

Regardless of how you’re actually notified, the feeling isn’t great.

A Margin Call occurs when your floating losses are greater than your Used Margin.

This means that your Equity is less than your Used Margin (since floating losses reduce your Equity).

“Margin Call Level” vs. “Margin Call”

Traders tend to get confused between a Margin Call Level and Margin Call.

  • A “Margin Call Level” is a threshold set by your broker that will trigger a “Margin Call”. It is a specific percentage (%) value of the Margin Level. For example, when the Margin Level is 100%.
  • A “Margin Call” is an event. When a Margin Call occurs, your broker takes some sort of action. Usually, the action is “to send a notification”. This event only occurs when the Margin Level falls below a certain value. This value is the “Margin Call Level”.

Think about boiling water.

For water to normally boil, the temperature must reach 100° C.

  • The Margin Level is equivalent to temperature. Temperature can vary and can be any number like 0° C, 47° C, 89° C, etc.
  • The Margin Call Level is equivalent to 100° C, which is a specific temperature.
  • A Margin Call is equivalent to water boiling, the event when the liquid changes into a vapor.

Example: Margin Call Level at 100%

Let’s say your forex broker has a Margin Call Level at 100%. This means that your trading platform will send you a warning notification if your Margin Level reaches 100%.

Margin Call Level = Margin Level @ 100%

Aside from receiving a notification, your trading will also be affected.

If your account’s Margin Level reaches 100%, you will NOT  be able to open any new positions, you can only close existing positions.

A Margin Call Level at 100% means that your Equity is equal to or lower than your Used Margin.

This occurs because you have open positions whose floating losses continue to INCREASE.

Let’s say you have a $1,000 account and you open a USD/CHF 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).

At this point, you still suck at trading so right away, your trade quickly starts losing.

It’s losing big time. (You really suck at trading.)

You’re now down 800 pips. 

At $1/pip, this means you have a floating loss of $800!

This means your Equity is now $200.

Equity = Balance + Floating P/L

$200 = $1000 - $800

Your Margin Level is now 100%.

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

100% = ($200 / $200) x 100%
Margin Call Level Example with USDCHF having a Floating Loss

Once the Margin Level reaches 100%, you will NOT be able to open any new positions unless:

  1. The market reverses back in your favor.
  2. Your Equity becomes greater than your Used Margin

If #1 doesn’t happen, #2 is only possible if you:

  • Deposit more funds into your account.
  • Close out existing positions.

The account will be unable to open any new positions until the Margin Level increases to a level above 100%.What happens if your sucky trade continues to go against you?

If this happens, once your Margin Level falls further to ANOTHER specific level, then the broker will be forced to close your position.

The other specific level is known as the Stop Out Level and varies by broker.

If a Margin Call event is the equivalent of water boiling, a Stop Out event is the equivalent of being burned by the boiling water!

Let’s now discuss what a Stop Out Level is in further detail.

Categories
6. Margin Trading 101

What is Margin Level?

What does “Margin Level” mean?

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.

The lower the Margin Level, the less Free Margin available to trade, which could result in something very bad…like a Margin Call or a Stop Out (which will be discussed later).

How to Calculate Margin Level

Here’s how to calculate Margin Level::

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

Your trading platform will automatically calculate and display your Margin Level.

If you don’t have any trades open, your Margin Level will be ZERO.Margin Level is very important. Forex brokers use margin levels to determine whether you can open additional positions.

Different brokers set different Margin Level limits, but most brokers set this limit at 100%.

This means that when your Equity is equal or less than your Used Margin, you will NOT be able to open any new positions.

If you want to open new positions, you will have to close existing positions first.

Example #1: Open a long USD/JPY position with 1 mini lot

Let’s say you have an account balance of $1,000.

Account Balance

Step 1: Calculate Required Margin

You want to go long USD/JPY and want to open 1 mini lot (10,000 units) position. The Margin Requirement is 4%.

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.

Required Margin = Notional Value x Margin Requirement

$400 = $10,000 x .04

Assuming your trading account is denominated in USD, since the Margin Requirement is 4%, the Required Margin will be $400.

Required Margin Example

Step 2: Calculate Used Margin

Aside from the trade we just entered, there aren’t any other trades open.

Since we just have a single position open, the Used Margin will be the same as Required Margin.

Used Margin Example

Step 3: Calculate Equity

Let’s assume that 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:

Equity = Account Balance + Floating Profits (or Losses)

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

The Equity in your account is now $1,000.

Equity with Breakeven Floating P/L

Step 4: Calculate Margin Level

Now that we know the Equity, we can now calculate the Margin Level:

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

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

The Margin Level is 250%.

If the Margin Level is 100% or less, most trading platforms will not allow you to open new trades.No More Trades

In the example, since your current Margin Level is 250%, which is way above 100%, you’ll still be able to open new trades.

Green Light

Imagine the Margin Level as being a traffic light.As long as the Margin Level is above 100%, then your account has the “green light” to continue to open new trades.

Recap

In this lesson, we learned about the following:

  • Margin Level is the ratio between Equity and Used Margin. It is expressed as a percentage (%).
  • For example, if your Equity is $5,000 and the Used Margin is $1,000, the Margin Level is 500%.

In previous lessons, we learned:

  • What is Margin Trading? Learn why it’s important to understand how your margin account works.
  • What is Balance? Your account balance is the cash you have available in your trading account.
  • What is Unrealized and Realized P/L? Know how profit or losses affect your account balance.
  • What is Margin? Required Margin is the amount of money that is set aside and “locked up” when you open a position.
  • What is Used Margin? Used Margin is the total amount of margin that’s currently “locked up” to maintain all open positions.
  • What is Equity? Equity is your Balance plus the floating profit (or loss) of all your open positions.
  • What is Free Margin? Free Margin is the money that is NOT “locked up” due to an open position and can be used to open new positions.

Let’s move on and learn about the concept of Margin Call Level.