Professional Documents
Culture Documents
LuckScout Team
I always see that so many traders who trade forex, don’t know what margin, leverage, balance, equity, free
margin and margin level are.
As a result, they don’t know how to calculate the size of their positions.
Now... before you read the rest of this article, make sure to check This System.
Indeed, they have to calculate the position size according to the the risk and the stop loss size.
Margin and leverage are two important terms that are usually hard for the forex traders to understand.
It is very important to understand the meaning and the importance of margin, the way it has to be calculated,
and the role of leverage in margin.
In order to understand what margin is in Forex trading, first we have to know the leverage.
What Is Leverage?
“Leverage” is a feature offered by the brokers.
It helps the traders to trade the larger amounts of securities through having a smaller account balance.
For example, when your account leverage is 100:1, you can buy $100 by paying $1.
Therefore, to buy $100,000 (one lot), you should pay only $1000.
A small exercise:
How much do you have to pay to buy 10 lots USD through an account that its leverage is 50:1?
That is right.
$1,000,000 / 50 = $20,000
I had to explain it first, to become able to talk about the other term which is margin.
But to understand the margin, let’s forget about the leverage for now and assume that your account is not
leveraged or its leverage is 1:1 indeed.
“Required Margin” is the amount of the money that gets involved in a position or trade as collateral.
Let’s say you have a $10,000 account and you want to buy €1,000 against USD.
1 of 7 11/1/2018, 2:45 PM
Leverage, Margin, Balance, Equity, Free Margin, Margin Call And ... https://www.luckscout.com/leverage-margin-balance-equity-free-ma...
Therefore:
€1,000 = $1,431.4
If you take a 1000 EUR/USD long position (you buy €1000 against USD), $1,431.4 from your $10,000 account
has to be locked in this position as collateral.
When you set the volume to 0.01 lot (1000 unit) and then you click on the buy button, $1,431.4 from your
account will be paid to buy 1000 Euro against USD.
This “locked money” which is $1,431.4 in this example, is called Required Margin.
To buy 1000 Euro against USD, you have to pay 1/100 or 0.01 of the money that you had to pay when your
account was not leveraged.
Therefore, to buy 1000 Euro against USD, you have to pay $14.31:
Now, please tell me that if you take a one lot EUR/USD position with an account with the leverage of 100:1, how
much margin will be locked in this trade?
Leverage: 100:1
Therefore, to have a one lot EUR/USD position with a 100:1 account, a $1,431.40 margin is needed, while the
EUR/USD rate is 1.4314.
You can use the below margin calculator to calculate the required margin in your trades:
For example, when you have a $5000 account and you have no open positions, your account balance is $5000.
When you have no open position, and so no floating profit/loss, then your account equity and balance are the
same.
When you have some open positions and for example they are $1,500 in profit in total, then your account equity
is your account balance plus $1,500. If your positions is $1,500 in loss, then your account equity would be your
account balance minus $1,500.
2 of 7 11/1/2018, 2:45 PM
Leverage, Margin, Balance, Equity, Free Margin, Margin Call And ... https://www.luckscout.com/leverage-margin-balance-equity-free-ma...
Free margin is the difference of your account equity and the open positions’ required margin:
When you have no positions, no money from your account is used as the required margin.
As long as you have no positions, your account equity and free margin are the same as your account balance.
Let’s say you have a $10,000 account and you have some open positions with the total required margin of $900
and your positions are $400 in profit.
Therefore:
Brokers use it to determine whether the traders can take any new positions when they already have some
positions.
Different brokers have different limits for the margin level, but this limit is usually 100% with most of the
brokers.
Indeed, 100% margin call level happens when your account equity, equals the required margin:
It happens when you have losing position(s) and the market keeps on going against you.
As a result, when your account equity equals the margin, you will not be able to take any new positions anymore.
Let’s say you have a $10,000 account and you have a losing position with a $1000 required margin.
If your position goes against you and it goes to a -$9000 loss, then the equity will be $1000 ($10,000 – $9,000),
which equals the required margin:
If the margin level reaches 100%, you will not be able to take any new positions, unless the market turns around
and your equity becomes greater than the required margin.
If the market keeps on going against you, the broker will have to close your losing positions.
Different brokers have different limits and policies for this too.
3 of 7 11/1/2018, 2:45 PM
Leverage, Margin, Balance, Equity, Free Margin, Margin Call And ... https://www.luckscout.com/leverage-margin-balance-equity-free-ma...
Usually, closing one losing position will take the margin level higher than 5%, because it will release the required
margin of that position, and so, the total used margin will go lower and therefore the margin level will go higher.
The broker’s system takes the margin level higher than 5% by closing the biggest losing position first.
However, if your other losing positions keep on losing and the margin level reaches 5% again, the system will
close another losing position.
Why the broker closes your positions when the margin level reaches the Stop Out Level?
The reason is that the broker cannot allow you to lose more than the money you have deposited in your account.
The market can keep on going against you forever and you lose all the money you have in your account and then
get a negative balance if nobody closes your losing positions.
If you don’t pay the negative balance, the broker has to pay it to the liquidity provider.
As it is almost impossible to take the loss from the trader, brokers close the losing positions when the margin
level reaches the Stop Out Level, to protect themselves.
Then the market reaches where one of your pending orders are placed while you have no enough free margin in
your account.
Therefore, the pending order will not be triggered or will become cancelled automatically.
The traders who don’t know what “cancelled by the dealer” is, will complain when they see that a pending order
is cancelled or not triggered.
They think that the broker had not been able to carry their orders, because their liquidity providers had no
enough liquidity or because the broker is a bad one.
But the the truth is that the pending orders could not be triggered or were cancelled because there was no enough
free margin in the account.
You have to have free money in your account to take a new position. When you don’t, you can’t take any new
positions.
There is a margin check that tests for what the MT4 account margin level will be after the trade is open.
If the the MT4 account margin level is within the acceptable limits, it let’s the trade through.
The threshold for measuring the post-trade margin ratio is set by the broker usually at 120%.
It means that the bridge will calculate what the used margin will be in the MT4 account after the new trade
opens.
If the account equity is less than 120% of the post-trade used margin, the trade will fail margin check and will be
automatically cancelled by the bridge MT4 dealer accounts.
Of course different brokers have different post-trade margin ratio settings, but it is usually 120%.
However, you have to know what they are and what they mean.
As I explained above, the only parameter that you have to calculate, is your position size that has to be calculated
based on the stop loss size of the position you want to take, leverage, and the percentage of the risk you want to
take in that position.
4 of 7 11/1/2018, 2:45 PM
Leverage, Margin, Balance, Equity, Free Margin, Margin Call And ... https://www.luckscout.com/leverage-margin-balance-equity-free-ma...
Level?
You can see all of these parameters by checking the MT4 terminal.
The terminal will be opened and it shows your account balance, equity, margin, free margin and margin level.
This is how the terminal looks when you have no open position:
The profit/loss will be added/deducted to the initial balance and the new balance will be displayed.
Margin = $2,859.52
(200,000 x 1.4300) / 100 = $2,860.00
You may need to read the above explanations for a few times to completely digest the terms I explained.
When the leverage is 100:1, it means you can trade 100 times more than the money you have in your account.
Or, you can trade 100 units with one unit of you account balance.
– Required Margin:
Is the money that will be placed and locked in the positions that you take.
For example, to buy $1000 with the leverage of 100:1, $10 from your account will be locked in the position
5 of 7 11/1/2018, 2:45 PM
Leverage, Margin, Balance, Equity, Free Margin, Margin Call And ... https://www.luckscout.com/leverage-margin-balance-equity-free-ma...
You can not use this $10 to take any other positions, as long as the position is still open.
– Balance:
Is the total amount of the money you have in your account before taking any position.
When you have an open position and its profit/loss goes up and down as the market moves, your account balance
is still the same as it was before taking the position.
If you close the position, the profit/loss of the position will be added to or deducted from your account balance,
and the new account balance will be displayed.
– Equity:
Equity is your account balance plus the floating profit/loss of your open positions.
For example when you have an open position which is $500 in profit while your account balance is $5000, then
your account equity is $5,500.
If you close this position, the $500 profit will be added to your account balance and so your account balance will
become $5,500.
If it was a losing position with -$500 loss, then while it was opened, your account equity would be $4,500 and if
you close it, $500 will be deducted from your account balance and so your account balance will be $4,500.
When you have no open positions, your account equity will be the same as your account balance.
– Free Margin:
Free margin is the money that is not engaged in any trade and you can use it to take more positions.
Free margin is the difference of the equity and the required margin.
If your open positions make money, the more they go to profit, the greater equity you will have, and so you will
have more free margin.
– Margin Level:
Margin level is the ratio (%) of equity to margin.
For example, when the equity is $1000 and the margin is also $1000, margin level will be $1000 / $1000 = 1 or
in fact 100%. If the equity was $2000, then the margin level would be 200%.
When Margin Call Level setting is 100%, you will not be able to take any new positions if your margin level
reaches 100%.
While having losing positions, your margin level goes down and becomes close to the margin call level.
When you have winning positions, your margin level goes up.
6 of 7 11/1/2018, 2:45 PM
Leverage, Margin, Balance, Equity, Free Margin, Margin Call And ... https://www.luckscout.com/leverage-margin-balance-equity-free-ma...
If this helps the margin level go above the stop out level, then it doesn’t close any more positions.
Then if your other losing positions keep on losing and the margin level goes below the stop out level again, the
system closes another losing position which is the biggest open losing position.
Join Our 24,000+ Loyal Followers Now & Receive Our E-Book For Free!
Download Our E-book For FREE and Don't Miss Our New Articles!
Enter your email address and check your inbox now:
7 of 7 11/1/2018, 2:45 PM