What is Margin Level?

Margin Level is simply the relationship between the Equity and the used Margin of the trading account. Expressed as a percentage, the formula used to calculate the margin level is: (Equity/Margin) x 100.

Margin Level allows trader to know how much of your funds are available for new trades. The more the Margin Level, the more Free 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 you can Calculate Margin Level

Let's show how to calculate Margin Level:

Margin Level = (Equity / Used Margin) x 100%

The trading platform you are using will automatically calculate and display your Margin Level.

If you dont have any trades open, your Margin Level will be ZERO.

Margin Level is very important. Forex brokers use margin levels to know if you can open more positions or not.

Different forex 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.

To understand clearly, let's take some few examples

Example #1: Open a long USD/JPY position with 1 mini lot

Lets say your account has a balance of $1,000.

Step 1: Calculate Required Margin

You want to go long USD/JPY and want to open 1 mini lot (10,000 units) position. The Margin Requirement is 4%.

How much margin (Required Margin) will you need to open the position？

Since USD is the base currency. this mini lot is 10,000 dollars, which means the positions Notional Value is $10,000.

Required Margin = Notional Value x Margin Requirement

$400 = $10,000 x .04

Supposed your trading account is denominated in USD, since the Margin Requirement is 4%, the Required Margin will be $400.

Step 2: Calculate Used Margin

A part from the trade we just entered, there are no any other trades left open.

Since we just have a single position open, the Used Margin will be the same as Required Margin.

Next Step 3: Calculate Equity

Lets take say the price has moved slightly in your favor and your position is now trading at breakeven.

This means that your Floating P/L is $0.

Let us calculate the Equity using the formula:

Equity = Account Balance + Floating Profits (or Losses)

$1,000 = $1,000 + $0

The Equity in your account is now $1,000.

Step 4: Calculate Margin Level

Now that we know the Equity, we can now calculate the Margin Level:

Margin Level = (Equity / Used Margin) x 100%

250% = ($1,000 / $400) x 100%

Hence The Margin Level is 250%.

But In the case where the Margin Level is 100% or less, majority of the trading platforms will not allow you to open new trades.

The given example, since your current Margin Level is 250%, which is somehow above 100%, youll still be allowed to open new trades.

Just Imagine the Margin Level as being a traffic light.

As long as the Margin Level is above 100%, then your account is said to has the “green light” means you will be able to continue to open new trades.

Recap

In this lesson, we have learned about the following:

• Margin Level which we defined as the ratio between Equity/ sum of the Traders capital and Used Margin. It is expressed as a percentage (%).

• We have given some example, if your Equity is $5,000 and the Used Margin is $1,000, the Margin Level is 500%.