3.

Margin Trading System

 -What is Margin Trading

 -What is Equity
 -What is Free Margin & How to calculate Free Margin
 -What is Margin Level
 -What is Margin Call Level
 What is Stop Out level
 -How to avoid Margin Call
 Margin trading gives you the ability to enter positions larger
than your account balance.

Margin
Trading
A change in one causes a change in another. As a trader, you need to be
aware of the relationships between them…
 Margin
Requirement
• Margin is expressed as a percentage (%)
of the “full position size”, also known as Currency Pair EUR/USD GBP/USD USD/JPY EUR/AUD
the “Notional Value” of the position you
wish to open.
• Depending on the currency pair and forex Margin 2% 5% 4% 3%
broker, the amount of margin required to Requirement
open a position VARIES.
• You may see margin requirements such as
0.25%, 0.5%, 1%, 2%, 5%, 10% or higher.
This percentage (%) is known as
the Margin Requirement.
What is Required
Margin
Trade 2% Margin
When margin is expressed as a specific
Size Requirement
amount of your account’s currency, this
amount is known as the Required Margin.
100,000 $2000
EACH position you open will have its own
Required Margin amount that will need to
be “locked up”. 10,000 $200
Required Margin is also known as Deposit
Margin, Entry Margin, or Initial Margin. 1000 $20
 Equity
-The account equity or simply “Equity” represents the current value of your trading account.

Equity $1000

Balance $1000

How to Calculate Equity If You Have Trades Open- If you have open positions, your Equity is the sum of your
account balance and your account’s floating P/L.
Equity = Account Balance + Floating Profits (or Losses)

Equity $950
Balance $1000
Floating P/L -$50
 Free Margin
Margin can be classified as either “used” or “free”.

• Used Margin, which is just the aggregate of all the Required Margin from all open positions.
• Free Margin is the difference between Equity and Used Margin.
• Free Margin is also known as “Usable Margin” because it’s margin that you can “use” or it’s “usable”.
Free Margin

The amount that EXISTING positions can

Amount available to open NEW POSITION move against you before you receive a
Margin Call or Stop Out.
 How to calculate Free Margin
Free Margin = EQUITY-USED MARGIN
Free Margin has two conditions that can effects your Equity Balance

If you have open positions, and they are If your open positions are losing money, your
currently profitable, your Equity will increase, Equity will decrease, which means that you
which means that you will have Freer Margin will also have less Free Margin as well.
as well.

Floating profits increase Equity, which Floating losses decrease Equity, which
increases Free Margin.  decreases Free Margin. 
Margin Level

 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 Freer 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

 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.
Margin Call Level

• What does “Margin Call Level” or “Margin Call” mean?

• In forex trading, the Margin Call Level is when the Margin
Level has reached a specific level or threshold.
• When this threshold is reached, you are in danger of the
POSSIBILITY of having some or all of your positions
forcibly closed (or “liquidated “).
• The Margin Level is the “metric” and the “Margin
Call Level” is a specific “value” of the metric (which is the
Margin Level). Yeah, it’s awkward. But don’t blame us,
we’re not the ones who name these things.
• For example, some forex brokers have a Margin Call Level
of 100%.
 What is Stop Out Level

•  Margin Level falls to a specific percentage (%) level in which one or all of your open
positions are closed automatically (“liquidated”) by your broker.

• This liquidation happens because the trading account can no longer support the open
positions due to a lack of margin.

• More specifically, the Stop Out Level is when the Equity is lower than a specific
percentage of your Used Margin. If this level is reached, your broker will automatically
start closing out your trades starting with the most unprofitable one until your Margin
Level is back above the Stop Out level
Example: Stop
Out Level at 20%

• Let’s say your forex broker

has a Stop Out Level at 20%.
• This means that your trading
platform will automatically
close your position if
your Margin Level reaches
20%.
• Stop Out Level = Margin
Level @ 20%.
• You’ve already received a Margin Call when
the Margin Level had reached 100% but still
decide not to deposit more funds because you
think the market will turn.
• That’s is what as a Trader can Make a biggest
mistake.
• The market continues to fall. You’re now
down 960 pips.
• At $1/pip, you now have a floating loss of $960!
• This means your Equity is now $40.
• Equity = Balance + Floating P/L
• $40 = $1000 - $960
•  
• Your Margin Level is now 20%.
• Margin Level = (Equity / Used Margin) x 100%
• 20% = ($40 / $200) x 100% *Used Margin can’t
go below $200 because that’s the Required
Margin that was needed to open the position in
the first place.
At this point, your position will be automatically
closed (“liquidated”). When your position is closed,
the Used Margin that was “locked up” will
be released.

It will become Free Margin. The end result for you

will be depressing though. Your floating loss of $960
will be “realized”, and your new Balance will be $40!

Since you don’t have any open trades, your

Equity and Free Margin will also be $40.
Leverage

• Leverage is the increased

“trading power” that is available
when using a margin account.
• Leverage allows you to trade
positions LARGER than the
amount of money in your
trading account.
• Leverage is expressed as a ratio.
• Leverage is the ratio between
the amount of money you really
have and the amount of money
you can trade.
 Here are five ways to avoid a margin call.

1. Know what a margin call is.

2. Know what the margin requirements are even before you
place ANY order.
3. Use stop loss orders or trailing stops to avoid margin calls.
How to avoid 4. Scale in positions rather than entering all at once.

Margin Call 5. Know what you are doing as a trader.

6. Lock the Position
7. Add extra fund

Don’t be that trader.

Risk management should be your main priority, not profits.