Considering risk management a top priority is the first rule that will keep you long enough in the trading game. The terms margin, free margin, and leverage are usually heard while talking about risk management in margin trading. However, in this post, I am going to discuss what margin level is and how it is important for you to know.
The margin level is the amount of money that a trader has available to establish new positions. It is the equity to utilised margin ratio expressed as a percentage. When it reaches 100%, it implies that the threshold of available margin has been used (set by the broker) and no further positions may be opened.
In simple words, the margin level is a risk management indicator that helps you evaluate the impact of open positions on your account. The bigger the margin level, the more cash is accessible to trade. The lower the margin level, the less cash available to trade, and this is when an account may face a margin call.
Or, from a layman’s perspective, the bigger your position size relative to your account, the lower the chance of opening new trades. Many trading platforms have margin levels in %, equity, and free margin in terms of account currency in their profit and loss boxes.
The margin level % is significant since brokers use it to evaluate whether or not you may create fresh trades. Many contracts for difference brokers have a 100% minimum margin percentage requirement. If your margin percentage falls below that level, you will face a margin call — or perhaps a forced liquidation — on one or more of your open trades. You’d have to sell a current stake or add additional cash to your account if you wanted to take on new ones.
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If your platform does not show margin level, here is an example for you to help you calculate yours.
Top 10 forex indicators - This might surprise you — 2023Margin Level = Equity/Margin * 100%
Suppose you have $10,000 in equity with $250 in the margin with an open position in profit. Here is how you can calculate your margin level.
Margin Level= 10,000/250 * 100% = 4000%
If you don’t have any trades open, you will have a margin level of 0%. The broker may issue a margin call if the margin level goes below 100%. When you receive a margin call, you must deposit more dollars (or assets) into your account until the market returns to your favour. A margin call might also be satisfied by closing your present open positions.
The percentage margin level is determined by many things. The number of your positions, their potential market impact, and the amount of leverage you deploy can all impact your margin level calculation. Margin trading is quite common among retail forex traders. By dedicating only a small amount of your trading account as the margin, or collateral for the trades, you may build a considerably greater position than your original trading account would normally allow. Trading on margin has more risks because your earnings and losses are amplified.
