One of the great advantages of CFD's and forex market is the ability to trade with margin. Margin trading offers the ability to enter positions larger than your account balance. But the concept of "margin" is often misunderstood. Next, we will learn about the concepts of Balance, Equity, and Margin.
As soon as your account is opened and approved, to start trading you will need to fund it with your “risk capital”. The "Account balance" or simply "Balance" shows the amount of money you have in your trading account. If you deposit $ 2,000, your balance will be $ 2,000.
The result of active operations, not yet closed, is called "unrealized P / L”. Unrealized P / L fluctuates continuously with current market prices, and shows the current result of the account in the event of closing of all opened trades. For example, if you have US $ 100 of unrealized profit on EURUSD, and the price moves against you, the unrealized profit could become an unrealized loss of say 50 USD.
Now let's consider that at the time that the unrealized profit was 100 USD, all operations were closed. This will be now the realized profit, since the orders are closed and will no longer be able to fluctuate with the market fluctuations. If you closed a position with profits, your account balance will increase. If you closed with losses, your account balance will decrease.
Account equity represents the current value of your trading account. Equity is the sum of your account balance and all floating (unrealized) profits or losses associated with your open positions. That is, it is the "floating account balance", and it will become your "real account balance" if you immediately close all your open trades. It is represented by the formula:
Equity=Balance+Unrealized PL (profit or losses)
For example, if your balance is 1,000 USD and you have an open trade with a floating gain of 700 USD, your equity is 1,700 USD. However, if the balance is 1,000 USD and the floating loss is 600 USD, your equity is only 400 USD.
You only need to place a small amount of capital to open and maintain a new Trade. This capital is known as margin and each position you open will have its own Required Margin value that will need to be "blocked".
Let's say you want to buy 1 lot (100,000 USD) from the USDCHF pair, you do not need to put 100 000 USD in your account balance, but only a portion and it can be as little as 2,000 USD. Assuming that the margin requirement is 1%, the required margin for the 1 lot USDCHF will be USD 1000. That is, you can open the trade for 1 lot in swissie, and for that, $ 1,00 will be 'blocked' from your account until the transaction is closed . We call this locked money the Used Margin.
So in the example above, the trader takes 2000 USD into account, with 1,000 USD being the margin used and 1,000 USD the free margin. Therefore Free margin is the difference between equity and margin used.
The free margin can be interpreted in two ways. The amount available to open new positions. It is the amount that existing positions can move against you before you receive a margin or stop call.
You can check your MT4 account information simply by clicking “Ctrl + T”, the window below will appear:
The margin call occurs when the margin level reaches a specific limit. That is, when your floating losses are greater than your used margin. The margin call limit can vary from broker to broker and when it is reached, you run the risk of having some or all of your positions forcibly closed.
An example to facilitate understanding. A trader has 1000 USD in account, which has a margin limit of 30%, and is long in EURUSD, however, the market makes a strong bearish movement and the fluctuating loss of his account becomes 700 usd. So the free margin on the account is 300 usd, or 30%, and this trader will receive a margin call.
Stop Out Level
Continuing the hypothetical example above, if the trader does not close his orders and the market continues to fall, his losses will increase and his free margin will decrease further until reaching the Stop Out Level.
If that level is reached, toin order to protect you from possible additional losses, the broker will automatically begin to close your orders until the margin level returns to the acceptable level.
The illustration below can help you view margin levels more easily.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.