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.
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.
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.
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.
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%
If the Margin Level is 100% or less, most trading platforms will not allow you to open new 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.
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.