MARGIN AND LEVERAGE
The margin and leverage are the two important terms that are generally difficult to understand for Forex traders. It is very important to understand the meaning and importance of margins, how they are calculated and the role of margin leverage.
Leverage is a feature that is offered by the broker in order to help operators to trade with larger amounts of values having a smaller balance in an account. For example, if your account leverage is 100: 1, you can buy $ 100 paying top dollar. This way you pay only $ 1000 in order to buy $ 100,000 (1 lot). This is just an example, because I do not know anyone who pays a dollar to buy a dollar.
Now tell me please. How much should you pay to buy 10 lots of dollars with an account with leverage is 50: 1?
So is! You have to pay $ 20,000 to buy 10 lots or one million dollars:
$ 1,000,000 / 50 = $ 20,000
Leverage was so easy to understand, right? First I had to explain it in order to be able to speak another term, as the margin.
The margin is calculated based on the leverage, but to understand the margin, it is better that we forget the leverage now and assume that your account is not leveraged or indeed its leverage is 1: 1
Margin is the amount of money involved in a position or an operation. Let’s say you have a $ 10,000 account and want to buy 1,000 euros against the USD. How much dollars you have to pay 1,000 euros to buy?
The contribution rate of EUR / USD is currently 1.4314. That means that every euro equals $ 1.4314. This way you have to pay $ 1,431.40 to buy 1,000 euros:
€ 1,000 x 1,000 = $ 1.4314
€ 1,000 = $ 1.431.4
If you take 1000 EUR / USD long term (you buy € 1000 to USD), $ 1.431.4 your account of $ 10,000 must participate in this position. When you set the volume to 0.01 lots (1000 units) and then select the button to buy, $ 1.431.4 your account will be paid to buy 1000 EUR to USD. $ 1.431.4 These are known as margin. Now, if you close your position EUR / USD, $ 1.431.4 these will be released and return to your account balance.
Now let’s assume that your account has a leverage of 100: 1. 1000 euros to buy the USD, you have to pay 1/100 or 0.01 of the money you had to pay when your account was not leveraged. Therefore, to buy 1000 euros to USD, you have to pay $ 14.31:
¿$ 1.431.4 / 100 = $ 14.31
Now, please tell me if you take a lot of EUR / USD with an account with leverage of 100: 1, how the margin of participation in trade?
A EUR / USD = 100,000 euro against dollar portion
Rate EUR / USD: 1.4314
X 1.4314 = 100.000 143.140.00
A portion of € 143,140.00
Leverage 100: 1
The margin is 100: 1 = $ 143.140.00 / 100 = $ 1.431.40
Therefore, to have a lot of EUR / USD with a score of 100: 1, the required margin is $ 1.431.40.
You can use the calculator to calculate the margin required margin in their shops:
When you have no open position, the balance is the amount of money you have in your account. For example, when you have $ 5000 in your account and you have no open position, your account balance is $ 5000.
Equity is your account balance plus profit gain / loss of open positions:
Equity = balance + profit gain / loss
When you have no open position, and no profit gain / loss, your account equity and balance are the same.
When you have some open positions and for example are $ 1,500 total profit, then the equity of your account is the account balance over $ 1,500. If your positions were $ 1,500 in loss, then your account equity would be your account balance minus $ 1,500.
Free margin is the difference of your account equity and margin of open positions.
Free margin = equity – margin
When you have no position, no money in your account it is used as the margin. Therefore, all the money you have in your account is free. While you have no position, your account equity and free margin are the same as the balance of your account.
Say you have an account with $ 10,000 and you have some open positions with the total margin of $ 900 and their positions are $ 400 in profit. Thus:
Equity = $ 10,000 + $ 400 = $ 10,400
Free margin = $ 10,400 – $ 900 = $ 9,500
LEVEL OF MARGINS
The margin level is the ratio of equity to margin
Margin level: = (Equity / Margin = x 100
The margin level is very important. Runners use it to determine if traders may or may not take new positions. Different brokers have different limits for the margin level, but the limit is usually 100% mostly. The limit is called Margin Call level. A margin call level of 100% means that if the margin level of your account reaches 100% even may close the positions that were open, but you can not take new. In fact, a margin call level 100% happens when your account equity equals the margin. This happens as has positions in loss and the market is going against you when your account equity equals the margin, will no longer be able to take new positions.
Say you have a $ 10,000 loss a position with a margin of $ 1000. If your position goes against you and falls to a loss of – $ 9000, then the equity will be $ 1000 ($ 10,000 – $ 9,000), which is equal to the margin. Therefore, the margin level will be 100%. If the margin level reaches 100%, you will not be able to take new positions at all, unless the market turns suddenly and equity becomes larger than its margin.
But what if the market continues to move against you?
If the market continues to move against him, the broker will be forced to close their positions at a loss. Different brokers have different limits for this too. This limit is called Closing Forcing positions. For example, when the forced closing level is set at 5% for a runner, the platform begins to close their positions in loss automatically. If your margin level reaches 5%, it begins to close from the largest position.
Usually, closing a loss position will raise the level of margin to a point greater than 5%, because apart from the release position, making the total used margin level decreases and the level of margin to rise. The system has the margin level higher than 5%, closing the largest first position. Anyway, if your other losing positions continue to lose and the margin reached 5% again, the system will close another position loss.
Why the corridor close their positions when the margin reaches the level of Stop Out?
The reason is because the broker can not afford to lose more money you have deposited in your account. The market may continue to go against them and the broker can not pay for this continued loss. It makes sense, right?
How to check the balance of your account, its capital, margins and margin levels?
You can view this information by reviewing the MT4 terminal. Open MT4 and press Ctrl + T.
The terminal will open and show you the balance of your account, its capital, your margin, your available margin and margin level.
This is how it looks when the terminal is not open:
And this is how it looks when the terminal is open:
This could change using other platforms
The balance of your account will change only when you close your session on the terminal.
The gain / loss will be added / deducted from the initial balance and the new balance will be displayed.
Balance – Profit / loss estimated current value =
$ 10,000 – $ 50 = $ 10.050
Margin = $ 2859.52
(200,000 x 1.4300) / 100 = $ 2,860.00
Present Value – Margin = Margin available
$ 10.050 – $ 2,859.52 = $ 7,190.48
(Current Value / Margin) x 100 = Margin Level
($ 10.050 / $ 2,859.52) x 100 = 351.46%
I hope so far is not confused. It is very easy to understand. You may need to read sometimes more explanations on the top to completely digest the terms I explained.
Briefly and in very simple words:
Leverage: is the bonus you receive from the commercial agent for you to have the opportunity to negotiate with large amounts having a small amount of money in your account. When leverage is 100: 1, it means that you can trade 100 times the money you have in your account.
Margin: This is the money that will be recorded and set to the positions you take. For example, to buy $ 1000 with leverage of 100: 1, $ 10 will be entered in your account and set in position ($ 1000/100 = $ 10). You can not use these $ 10 to take any other position during the time in which the position is still open. If you close the position, the range of $ 10 will be released.
Balance: The total amount of money you have in your account before taking any position. When you have an available position and profit / loss increases or decreases depending on movements in the market, your account balance will be the same balance you had before taking the position. If you close the position, profit / loss of the position will be added / deducted from your account balance and a new account balance will be displayed.
Capital: The capital is your account balance plus profit / loss estimated its available positions. For example, when you have an available position you have $ 500 as profit, and your account balance is $ 5000, then the capital of your account will be $ 5.500. If you close this position, the gain of $ 500 will be added to your account balance, which will make your balance is $ 5,500. If your position suffers a loss of – $ 500, then while it is open, the capital of your account will be $ 4.500 and if closed, will be deducted $ 500 from your account balance and this would become $ 4,500. When you do not have available positions, the capital of your account will be the same as your account balance.
Free Margin: Free margin is the money that is not engaged in any commercial activity and can be used to buy shares. Do you remember what was the margin, right? Free margin is the difference of equity and margin. In the above example, your margin position is $ 10. Say equity is $ 1000. Therefore, your free margin will be $ 990 (1000 – $ 10). If your actions allow you to earn money, the more you will profit more equity will have, and so have more free margin.
Margin Level: Margin level is the radio (%) of equity from the margin. For example, when equity is $ 1000 and $ 1000 range also, then we have the margin level will be $ 1000 / $ 1000 = 1 or, indeed, 100%. If equity out of $ 2000, then the margin level would be 200%.
Setting range: This is the level where if your bank goes under, you will not afford to buy new shares. The adjustment range is decided by the broker. As is set at 100%, you will not be able to take any new action if their margin reaches 100%. When you have decliners shares, low level approaches the threshold setting range. When you have gainers, rising margin.
Being out of level: The level that if your margin low level, the system starts to close their losing stocks. It will close its worst actions first. If this helps raise the margin adjustment to get out of level, no further action is closed. So if your other losing stocks continue losing and the adjustment range is still below the level, the system will close another action, which in this case will be the largest proportion.