What is the margin level in forex trading? In the previous discussion we have studied several parts of margin trading 101, about the margin requirements, required margins, used margins, equity, and also free margins.
Now we will continue the next discussion about margin levels. If we use the MetaTrader 4 platform then we will see a margin level in percent that changes to adjust the conditions of trading account changes.
What is the margin level percentage in the forex? Basically, the margin level is a percentage value between equity and used margin. The margin level provides information on how much you are able to open a new transaction.
The higher the margin level, the greater the chance of making a new transaction. And the lower the value, the lower the chance to open a new transaction.
If the value of the margin level is already very low, it is possible to get a margin call.
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How is the margin level calculated in the forex?
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On the MetaTrader trading platform, you have actually done automatic calculations. But it helps you know the formula for calculating this margin level, here the formula.
Margin Level percentage = (Equity / Used Margin) x 100%
When you do not have an open position the margin level value is 0. This margin level is important because forex brokers will use this margin level to allow you to open new positions or not.
Brokers will also provide rules for this margin level. But maybe each broker has different rules, it’s just that most of them give limits only up to 100%. With this limit, it means that you cannot open a new position if the value is equal or less than the value of the margin level.
If you want to open a new position then the way you can do is add a deposit. Or close your transaction first.
Example calculation level margin
You have a balance of 1000 $, and want to open long positions on the pair USD/JPY with a position size of 1 mini lot. The first step is to calculate the required margin, how much-required margin is needed to open a 1 mini lot position?
The margin requirement to buy USD / JPY 1 mini lot (10,000 units) is 4% because in this pair the base currency is USD, the national value of 1 mini lot is $ 10,000.
By using the required margin formula we get a number $400
Margin required = Notional Value x Margin Requirement $400 = $10,000 x .04
We have already got data the required margin of $400 to open a position of 1 lot mini of pair USD/JPY.
The second step is to calculate the used margin because here only one position is opened, the used margin is the same as the required margin, this means $ 400.
The third step is to calculate equity.
If after you open a position then the price moves to your favor, and you find floating profit/loss at 0, or you reach break-even. By using a formula to calculate equity, we get an amount of $ 1000.
Equity = Account Balance + Floating Profits/Loss $1,000 = $1,000 + $0
Here we get data for equity is $ 1,000, and from previous data for used margin is $ 400.
Our fourth step is to calculate the margin level using the data we have obtained above using the formula to calculate the margin level.
Margin Level percentage = (Equity/Used Margin) x 100% 250% = ($1,000 / $400) x 100%
From the above calculation, we know the margin level on buy positions USD/JPY 1 mini lot, when floating profit/loss at 0, is 250%.
With a margin level of 250%, it is still possible to open a new position. But if the value of the margin level is at 100% or less, then the trader not allowed to open a new position again.
Because there is a 100% margin level limit if you want to open a new position. You should pay attention to the margin level available at that time. If likened, this level margin is like a traffic light. If it turns red then you must stop, if it’s green you can run the vehicle.
What is the margin call level in the forex?
Continue on the next discussion about the margin call level, what is the margin call level? In forex trading, the margin call level is when the value of the margin level has reached a certain threshold.
If this happens to your trading account, it means that your account is in danger. And it is likely that your position will be forced to close automatically by the broker.
The margin call level is the specific value of the margin level metric. This sentence may be a bit confusing, but hopefully, it can be understood. Maybe each broker has different rules in terms of margin call this level.
There are those who give a limit of 100% or even lower, contact your broker to find out this rule.
If a trading account occurs, you find the margin level reaches a certain specific value. For example, 100%, a margin call will occur. Depending on your broker for the specific value of the margin call level.
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Margin call forex
What is the margin call based on? From the previous explanation, we stated that when the margin level has reached a certain threshold. This is the specific value of the margin call level. At this percentage amount, it is a dangerous condition for your account.
The margin call is when a broker notifies that the margin level has dropped to the threshold determined by the broker.
This notification is for the majority of brokers to notify via e-mail, unlike in the past using telephone calls. Maybe you will be surprised when you open the email and then get a notification from the broker that your margin level has dropped.
And it is recommended to add a new deposit to increase the margin level. Of course, this condition is not making us happy. But this is the risk of forex trading, sometimes expectations do not match reality.
When does a margin call happen? Margin calls occur when your floating loss is greater than your Used Margin.
This condition is where your Equity is less than your Used Margin (because floating loss reduces the amount your Equity).
What difference margin call level vs margin call?
Margin call level and margin call may be considered by some people to be two sentences with the same meaning, only because they both use margin call sentences.
But this has a different explanation, as follows.
- Margin call level is a threshold, which is determined by the broker as a trigger for a margin call, this is a specific percentage of the value of the margin level, like when the margin level is 100%.
- Margin calls are events, if a margin call occurs, the broker will notify the trader via email or telephone stating that the margin level threshold has reached a low level so that with this notification the trader can make the choice to set a trading account, whether to add a deposit or leave until it stops out, or it will close the transaction.
Your broker has a margin call level at 100% (this is just an example, maybe each broker sets a different number). This means if the margin level has reached 100%, then the platform will send a warning that the margin level has been reached.
When the margin call level has been reached, you cannot open new positions anymore, but you can close the active positions. The margin call level of 100% means that your equity is equal or less than used margin.
This is because your position is against price movements. So that floating loss increases and reaches a margin level of 100%.
Let say you have a balance of 1000 $ and open a buy position on the pair EUR / USD, for 1 mini lot, you use a used margin of $ 200 to open that position.
But after a few hours later, it turns out the price movement was not in accordance with your expectations. The price actually went down with a width reaching 800 pips (learn about pips).
While the value of 1pip is 1 $, then your floating loss is 800 $. So your margin level has reached the threshold to trigger a margin call. Your current equity is only 200 $ from the calculation of equity = account balance+floating profit/loss.
Equity = Account Balance + Floating Profit/Loss $200 = $1000 - $800
So that your current margin level is only 100%.
Margin Level percentage = (Equity / Used Margin) x 100% 100% = ($200 / $200) x 100%
With the margin level reaching the margin call level, this is like a traffic light that is a yellow light or warning to stop, and the platform notifies you of this warning via email or another way to you.
When your margin has reached 100% then you may not open a new position except:
- The market moves back to the position in accordance with your expectations so that the margin level increases again or equity is greater than the margin level.
- You replenish your account with new funds to increase the margin level.
- You close an existing position so that it will reduce the used margin and increase the margin level.
What is the stop out level in forex?
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What is the stop out level? How to calculate the stop out level? Stop out level meaning, similar to the margin call level as we have discussed before, but this condition is much worse.
Stop out level in forex is when the margin level has reached a certain specific number (%), in which the broker will close one of your positions one by one, and in the worst conditions, all positions will be liquidated automatically.
This automatic liquidation is because the margin level can no longer open new positions due to a lack of margin. Be more specific that your equity level is lower than the used margin.
If this level limit is reached, the broker will close the transaction at a loss condition until your margin level reaches above the stop out level.
If it turns out that your margin level is still lower than the stop out level, then the broker will close all transactions to prevent further losses.
But sometimes some cases are found after the stop out, the end of balance becomes a negative value. This is certainly related to very high leverage like as 1:1000 or higher, and volatility in price movements.
If the stop out level is reached automatically the broker will close your transactions one by one and even though you feel how painful it is to face this reality.
Example, Stop Out Level at 20%
Stop out level 20% means the broker will close your transaction automatically when the margin level reaches 20%.
Stop Out Level = Margin Level @ 20%
Referring to the previous example where the margin call level is 100%. If the broker has notified your account that you received a margin call but you did not make a deposit to increase the margin level. Then there is a possibility of price movements against your position causing the margin level to reach 20%.
If turn out the price dropped even further by 960 pips which means 960 $ if the value of 1 pip is equal to 1 $, this means that your remaining equity is 40 $
Equity = Account Balance + Floating Profit/Loss $40 = $1000 - $960
If the 20% stop out level is reached you will find your transaction will be forcibly closed by the broker.
Margin Level percentage= (Equity / Used Margin) x 100% 20% = ($40 / $200) x 100%
And when your account has been automatically closed because the stop out has been reached. Then you’re remaining 40 $ equity will be credited to your account balance and this is the rest of your money which was originally at 1000 $.
Painful maybe, but this is the risk of forex trading. If it’s like a traffic light, stop out is when the light is red and you have to stop.
If you have several open positions when the stop out level is reached. The broker will usually close the profitable transaction first. Each closed position will clear the used margin and automatically increase the margin level.
However, if closing one transaction is not enough to make a margin level above the stop out level of 20%. It will close other transactions and reach a level above 20%.
But if not finally reached, that was, all positions will be closed and you will find equity be an account balance. If there is no stop out level, then you will increasingly lose and may get negative equity. Then the broker prevents your loss from making a negative account balance.
In this margin level lesson, we have learned how margin call levels work. And also what margin calls are, and stop out levels. So that you do not face the worst conditions when a stop-out occurs.
Then choosing low leverage will certainly be safer. Because the rest of your account balance will be greater because at low leverage requires a large used margin.
But if you choose to use high leverage. The advantage is that you can open a position using a low used margin and this increases the potential profit.
But if you get stopped out, your remaining account balance will be very small.
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