Margin, Margin Call, Stop Out, and Margin Level Explained: A Beginner's Guide.

Leverage: The ratio of the amount of money you deposit to the amount of money you can control in the market.

Leverage is like a double-edged sword in Forex trading. It allows you to control a larger position size than what your account balance would typically allow. For instance, with a 100:1 leverage ratio, you can control a $10,000 position with just $100 of your own capital.

While leverage can amplify your profits, it also amplifies your losses. If the market moves against you, a high leverage ratio can quickly deplete your account in seconds. Therefore, it's crucial to use leverage wisely and only take on positions you can manage.

Here are some tips for using leverage safely:

• Start with a low leverage ratio. This will help you minimize your risk.

• Close losing trades early. Don't let them run too far against you.

• Add more margin to your account as your position size increases.

• Use stop losses to protect your profits.

Margin Required: This is an insurance deposit which provides cover for possible losses of a marginal trade and is used as a pledge. It depends on the current price of the currency pair, the contract size (standard lot size), and your chosen leverage.

Imagine you're buying a house and the owner asks you to pay a small portion of the total cost upfront as a deposit. This deposit, typically a percentage of the house value, secures your purchase. In Forex, the margin works similarly. It's the collateral or security you provide to your broker when you enter a trade. Instead of paying the full value of a currency pair, you only need to commit a fraction – the margin – as collateral.

Example 1:

Suppose you have an account balance (equity) of $10,000 and want to trade the EUR/USD currency pair with a current price of 1.07245. Your broker offers 1:100 leverage.

Using the formula:

MARGIN REQUIRED = (CURRENT PRICE x CONTRACT SIZE) / LEVERAGE

1 STANDARD LOT (1) = 100,000 units of any currency

1 MINI LOT (0.1) = 10,000 units of any currency

1 MICRO LOT (0.01) = 1,000 units of any currency

MARGIN REQUIRED = (1.07245 x 100,000) / 100 = $1,072.45

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Certainly, let's discuss with a scenario (EXAMPLE 2) where we have a ₣5000 in our trading account denominated in Swiss Francs (CHF), and we're considering opening a trade in USD/JPY with CMP of 147.157 with a lot size of 0.6?

ACCOUNT CURRENCY : CHF ACCOUNT BALANCE : ₣5000 LEVERAGE : 1:500 CURRENCY TO TRADE : USD/JPY CURRENT MARKET PRICE OF USD/JPY : 147.157 LOT SIZE : 0.6 = 60,000 Contract Size

MARGIN REQUIRED = (CURRENT PRICE x CONTRACT SIZE) / LEVERAGE = (147.157 X 60,000) / 500 =1,7658.88 JPY

NOW, WE HAVE TO CONVERT JPY TO CHF BECAUSE OUT ACCOUNT CURRENCY IS CHF

So, 1 JPY = 0.0061 CHF Required Margin will be (0.0061 * 1,7658.88) = 107.71 CHF.

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Certainly, let's discuss with another scenario (EXAMPLE 3) where we have a €9600 in our trading account denominated in EURO, and we're considering opening a trade in GBP/NZD with CMP of 2.12260 with a lot size of 0.03 and leverage of 1:50?

ACCOUNT CURRENCY : EURO ACCOUNT BALANCE : €9600 LEVERAGE : 1:50 CURRENCY TO TRADE : GBP/NZD CURRENT MARKET PRICE OF GBP/NZD : 2.12260 LOT SIZE : 0.03 = 3,000 Contract Size

MARGIN REQUIRED = (CURRENT PRICE x CONTRACT SIZE) / LEVERAGE = (2.12260 X 3,000) / 50 =127.35 NZD

NOW, WE HAVE TO CONVERT NZD TO EURO BECAUSE OUT ACCOUNT CURRENCY IS EURO

So, 1 NZD = 0.55 EURO Required Margin will be (0.55 * 127.35) = 70.04 EURO.

Now that you know the margin required, you can calculate the maximum lot size:

MAX LOT SIZE = ACCOUNT BALANCE / MARGIN REQUIRED

MAX LOT SIZE = $10,000 / $1,072.45 = 9.32 STANDARD LOTS

In this example, with a $10,000 account balance, you can open a maximum position size of approximately 9.32 standard lots of EUR/USD.

Margin Call: A notification from your broker that your margin level has fallen below a certain threshold and now it is necessary to increase funds on marginal account.

A margin call is just a friendly reminder from your broker that your trading account needs attention. When you open a position, you use a portion of your account's margin. If the trade starts to move against you, and your account balance falls below a certain threshold – the maintenance margin – you'll receive a margin call. This is your broker's way of saying, "Hey, you need to add more funds to your account, or we'll have to close your losing positions."

Stop Out: An automatic closure of your trades by your broker when your margin level falls below a certain level. Stop Out will be executed at current market price of biggest opened orders when the margin level is lower then Stop out level.

Now, let's discuss what happens when you don't pay attention to the margin call. When your account balance drops below a specified level (usually due to heavy losses), your broker initiates a stop-out. At this point, the broker starts closing your open positions, beginning with the most unprofitable ones, until your account balance is no longer in danger.

Think of the stop-out as a safety net to protect you from losing more money than you have in your trading account. While frustrating, it's an essential risk management tool that prevents your account from entering negative territory.

Now. Suppose you have an account with a broker that specified Margin Call at 40% and Stop Out at 20%. These are essential levels that help manage risk in your trading account. And are decided by the Broker.

STOP OUT = (MARGIN X STOP OUT) / 100

Stop Out = 20% (as provided by our broker)

Margin Used = $1,072.45 (the margin required to open the position as we calculated in EXAMPLE 1)

Equity = $10,000

Stop Out Level = (Margin x Stop Out) / 100

Stop Out Level = ($1,072 x 20) / 100

Stop Out Level = $214.40

In this case, the Stop Out Level is $214.40. If your account equity falls below $214.40 due to losses, your broker will automatically close your open positions to limit further losses and protect your account from reaching zero. It's a risk management mechanism to prevent your account from going into a negative balance.

Margin Level (%): Let's delve into the concept of margin level using an analogy. Imagine you're at a casino playing a card game. Before starting the game, the casino requires you to present some money as a guarantee to cover your bets. In forex trading, this money is called margin. It is a safety net to ensure you can pay for your trades.

MARGIN LEVEL (%) = (EQUITY / MARGIN USED) x 100

Now, let's talk about the margin level percentage. It's similar to a meter showing how much of your safety net you've used. This percentage is crucial because if it falls too low, it's a warning sign that you might run out of money. As a result, your trades could get automatically closed.

Here's how it works:

1. Margin Level Percentage above 100%: You're in a safe zone if your margin level percentage is 100% or higher. You have enough money to cover your trades and can continue trading without worrying.

2. Margin Level Percentage between 100% and 50%: This is the intermediate zone. Your margin level percentage is decreasing, indicating you're using some of your safety net and adding more funds to continue trading. You should be cautious and not risk too much because if it drops below 50%, you might face a margin call.

3. Margin Level Percentage below 50%: This is the danger zone. Your safety net is thin, and you must close some losing trades or add more money to your account to avoid a margin call. A margin call is like the casino telling you to put more money on the table or leave the game. Let's delve into the concept of margin level using an analogy. Imagine you're at a casino playing a card game. Before starting the game, the casino requires you to present some money as a guarantee to cover your bets. In forex trading, this money is called margin. It is a safety net to ensure you can pay for your trades.