Margin is calculated 2 ways: Used Margin and Free Margin. Used margin is the amount of money used to hold open positions. Free margin is the amount of funds available to place additional positions (see image below)
The margin level is calculated by dividing the current equity in an account by the current amount of margin in use (used margin). ( view figure 2 ) After dividing the equity by the margin move the decimal two places to the right. A trader whose equity is at $1,000 and who is using a $500 of margin would divide 1,000 by 500 which of course equals 2. Then move the decimal two places to the right; thus current margin level or percentage is 200%. At 100% margin level a trader is essentially using their entire available margin. When this level drops to 50% trades will automatically be closed to help ensure that a trader is not subject to losing more money than is held in their account. (see image below)
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November 26th, 2008 at 7:43 am
Thanks!.. that helps a lot. So now I know I should not let my margin level drop too low. Correct?
November 26th, 2008 at 9:12 am
That is absolutely correct! Treat your margin with respect and do not over leverage your account!
In forex money management is the one crucial factor that will determine whether you’re going to become a successful trader.
I recommend that you not let your margin level percentage drop below 1000%