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)

fxm1020_1.jpg


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)

fxm1020_2.jpg





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Author:
alan
Time:
Saturday, October 25th, 2008 at 6:35 am
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Educational Material, Forex University
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8 Responses to “How Margin Level Is Calculated”

  1. How Margin Level Is Calculated Says:

    [...] Original post by Alan’s Forex Blog – An Adventure In Currency Trading [...]

  2. Rosdi Says:

    Thanks!.. that helps a lot. So now I know I should not let my margin level drop too low. Correct?

  3. admin Says:

    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%

  4. diego Says:

    Why a high ‘Margin Level percent’ is dangerus?.

    On ZuluTrade.com a message tell me: A High Margil Level is dangerous becouse it may become a Margil Call.

    But if Equity is High, its better I think

    (equity = balance + current earnings)

    and so, a High Margin Level Percetn is very good.

    Wath do you think?

    greetings
    diego

  5. admin Says:

    Because you will be over-leveraged that way. The higher the leverage the higher the value of the position relative to your account balance and thus the market only has to move a little bit against you and you account would get a margin call.

    Yes equity is a totally different concept. Equity is just the current value of your account (balance + current open trades). When the equity is higher than account balance you’re in profit :) – ie your account size has increased.

    High margin level is a different thing. I think what you’re doing is confusing terms.

    A high margin level means you have a high level of margin FREE or AVAILABLE to be used. By high margin level percent zulutrade means to say that that your account is using up too much of your available margin. Thus the key is to make sure you don’t overload your account and keep the margin level at a reasonable 5-20% The lower the value the less risk you’re taking on.

    Play it safe – especially if you’re playing with real money.

  6. Peter Says:

    Why is it that Metatrader gives a warning by a pink color of the margin band when margin drops below 125%.
    I have much more money in the account, so don’t understand how the program can start giving me warnings

  7. admin Says:

    That level is set by your broker’s MT4 server I believe. Are you holding on to large positions (relative to your account balance) when you get this warning? If so it’s a sign you’re taking on too much risk – ie trading with lot sizes that are too large thus using up too much of your available margin.

  8. Al Says:

    Hello, I would I calculate what amount of money would be safe to withdraw and not put my margin level too low.

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