What is a margin level?
Before climbing into this question, we need to understand that margins are closely related to leverage. Margins change as leverage changes.
Leverage is a ratio of what you have against what will be available to you. When you trade on the Forex market, you must deposit some money into your account. Most brokers will accept as little as $100, although this amount is not advisable. The amount you start with can be viewed as a deposit on your future transactions. Your broker will advance more money as long as your deposit in his account will cover a required percentage of the ask price. This loan (or leverage) helps you to be a more dynamic trader. Whenever you are trading with borrowed money, be aware that this could be dangerous. All your life you have been told that you should never get into debt. Here we get a broker encouraging you to play with money that is not yours.
When you trade, the minimum allowable amount in your account is called the margin. A margin level in forex is represented as a percentage of your available funds. Margins will show how well you are doing. When the margin level in forex is high, your trading profile is good. The broker requires a decent margin in your account if you want to trade.
A margin level in forex gives a picture of how your account is doing. When the margin is high, your trading profile is good, the level is good, you can trade. If the market level is bad, your broker may not allow you to trade until you do something about it. You can put your trading on hold, sell some currencies or put some more money into your account. Margin level in forex is an equation. The equation helps to establish whether or not your account can handle the proposed transactions.
Margin level in forex = equity/margin x 100.
Equity is the amount of money you have in your account. As your trading is through the internet, your trading is available in real-time. If the equity is positive, you have a healthy margin.
When we are doing Forex trading, we are dealing with currency pairs e.g. USD/GBP.
- We must decide how much we want to spend in dollars (the base currency) to buy pounds (the quote currency).
- The exchange rate is also necessary for our calculation.
- The last thing we need to know is how many lots we will be buying.
To find the value of the exchange, we need to multiply the lot value by the exchange rate to get how much money is involved in the transaction.
When you open for business, your margin level in forex is a calculation that depends on three factors.
- How much you want to buy,
- Which currency pairs you are dealing with, and
- The leverage that the broker quotes.
When you are not trading, your margin level in forex is 0.
A used margin is the amount of cash that is waiting for your orders to be finalized.
What is margin level (%) in forex?
When you calculate the margin level in forex, the ratio of equity and actual margin is multiplied by one hundred. When a division sum (a ratio) is multiplied by one hundred, the answer is a percent.
If the equity and margin are identical, there is no margin level in forex. The margin level in forex is 100%, and no trading can result. A margin level in forex value that is greater than 100% means a margin level in forex exists. Your account is healthy. You can do transactions. You can do the currency swap.
If the margin level in forex is less than 100%, you may not be allowed to trade. When this happens, you will get a call to alert you to the situation. You can withdraw from trading for a period, sell some currency pairs, or invest more money in your account.
The amount you have in your account could be thought of as a deposit. The broker uses this amount to work out if you can swap your currency pair selection. Leverage (your broker’s money) is a ratio (a fraction). We then convert the fraction to a percentage by multiplying by 100
What is free margin level in forex?
You made an initial deposit into your trading when you started dealing in Forex currency pairs. The broker uses that amount as collateral so that you can do your trading. You are free to trade and use more money than you had when you opened your account. The amount that is standing collateral is called a free margin level in Forex.
When you log into your trading account, you will see the balance at that specific moment. This balance indicates the total amount in your account. The figure you see is your initial deposit plus any profits or extra amounts that you have invested, minus the money you may have lost. This figure is the account equity. Equity = your deposit + profit – loss.
Free Margin is the amount of money that you have available to trade. The calculation for Free margin = equity- used margin.
Equity is the balance on your account plus your profits minus your losses. Used margin represents the money that is tied up in transactions.
To sum up, it is the money in your account that you can use for trading.
Free margins are the margins that can be used.
What does 100% margin mean?
It is bad!
Margin level in forex = equity/used margin x 100.
If the result of this calculation is 100%, it means that equity = margin. Your broker will not be happy about this. The amount of money in your account is the same as the transactions. You have no money available for any further transactions.
If you have a 100% margin, your broker will make a margin call. No trader wants to receive a call like this. The margin call used to be telephonic, but brokers now use email or messages (WhatsApp, SMS, or Facebook message). When you receive a bad news call like this, you will either have to cease trading, make a further deposit, or sell some of your pairs. Some brokers will suspend your account with no notification. You are supposed to be keeping track of all your transactions. When you choose a broker, it is important to find out how he deals with 100% margin.