In the Forex (foreign exchange) market, there are important concepts that contribute to managing capital and understanding the level of risk. Among these concepts, there are “Free Margin” and “Margin Level”, which play a crucial role in determining the sustainability of your trading position and your ability to execute trades.
Free Margin: Free margin is the portion remaining in the trading account after deducting any active margin requirements. In other words, it is the money you have available to open additional trading positions. The free margin can be calculated as follows:
Free Margin = Equity – Used Margin “Equity” represents the current trading account value and is calculated in the following way: Equity = Balance + Profit/Loss
“Used Margin” is the amount held as collateral for your current trades. If free margin exists in large quantities, you will be able to open more trading positions without the risk of reaching zero margin levels.
Margin Level: The margin level is a percentage that appears as a percentage and is calculated in the following way:
Margin Level = (Equity / Used Margin) * 100 The margin level reflects the level of risk in your trading account. When the margin level approaches zero (usually less than 100%), this indicates that your account is at risk, and a “margin call” may occur, asking you to deposit more funds or close some positions to avoid forced liquidation. So, the free margin represents the funds you have available for trading, while the margin level also indicates the level of risk in your trading account.
How is margin level calculated? For the equation, the margin level appears as follows: (Total Equity / Used Margin) x 100 Let’s assume that the trader has a balance of $5,000 and has used $1,000 of it as margin.
What is margin trading?
Margin trading gives you the ability to enter into trades larger than your account balance. The meaning of margin in trading more broadly is the use of funds provided by a third party (which is the broker), and therefore margin accounts allow traders to access larger amounts of capital compared to regular trading accounts, which gives them the advantage of benefiting from their small capital. Simply put, margin trading amplifies trading results so that traders can make greater profits on successful trades.
For example: If the company offers a leverage of 1:100, meaning that for every $100 you want to trade, company will reserve $1 from your account, and this varies according to your choice of leverage.
Required Margin is a certain percentage of margin that you must cover in order to open the deal. This percentage varies depending on the currency pair, and for the Forex broker, the required amount may be 0.25%, 1%, 2%, 10%, or even more. This is an example of some currency pairs and the amount required to open the deal.
- GBP/USD = 5%
- USD/JPY = 4%
- EUR/USD = 2% Now let us assume that your balance is 2000 dollars, and you want to open an EUR/USD deal worth 20,000 dollars using margin, required margin will be 2% of the value of the deal (20,000), which is 400 dollars; Therefore, $400 will be reserved from your balance, which is $2000. I think the idea has become clearer now. True, I will give you this exercise. If your balance is $1,000, and you want to open a USD/JPY deal worth $10,000, what is value of the margin required to open this deal?
What is the reserved or used margin? To understand reserved margin (Used Margin), you must have a good understanding of the required margin.
Margin call margin call
What does a margin call mean: This is the worst thing that can happen to you when trading on margin in the world of Forex. The closer you get to the margin call, the more risky you become. Half or all of your deals can be closed automatically. Well, this is the reality, so let’s work on explaining it now. Therefore, if your margin level drops below 100%, you will reach the stage of requesting margin coverage. You reach this stage when your floating losses are greater than your used margin. Therefore, this means that your current value has become less than the used margin. More precisely, the margin call occurs at a specific margin level at which the trades are close to being automatically closed in order to avoid further losses on the trading account.
How do I know I am close to a margin call: Your broker will often tell you that your margin level has fallen below the minimum required level (“margin call level”). He can tell you with a phone call, email or SMS. But in any case, you will not be happy with this news. When you reach the margin call stage, you will not be able to open any more positions or trades. You can only close the currently open trades.
The relationship between the margin and the size of the leverage: The relationship between them is inverse, meaning that the higher the leverage, the lower the value of the reserved margin. Accordingly, we can conclude the following: The higher the leverage, the higher the risk, and it is a double-edged sword of profit and loss. We repeat, the higher the leverage, a smaller amount is reserved for each contract opened. This helps you use a high lot, but remember that the risk has become high.
The relationship of the margin to the lot size: It is a simultaneous direct relationship, meaning that the higher the lot size, the larger the reserved margin, and this varies according to the financial leverage chosen.
