Everything You Need to Know About Margin Trading

• Uncovering how to access financial instruments without paying the full price 
• Discovering how you can control larger positions with a small deposit
• Exploring how to calculate remaining funds available for more trades or withdrawals
• Learning how to detect if your account is in a risky position

Did you know that with CFDs (Contracts for Difference), you can trade a variety of financial instruments like stocks trade, indices, forex trading, commodities, and more without needing to pay the full price upfront? This is called Margin trading, and it’s like putting down a small deposit to control a much larger position. How does this work? It’s all thanks to something called Leverage, which your  financial broker provides. Think of Leverage as a tool that boosts your trading power. For example, with a 1:100 leverage with an Account Balance of $1,000, you can trade as if you had $100,000. It is important to note that while leverage can amplify your potential profits, it also increases your risks. That’s why it is important to understand how Margin trading works and the key terms involved. Let’s break it down step by step by using an example. 

DISCLAIMER: The below figures are ONLY an example and might not apply during your real trading journey as leverage, margin, and stop-out level depend on your country of jurisdiction and may vary from one to another. Please check with your relationship manager about your account specifications to understand better.

Imagine you have an Account Balance of $1,000 and you decide to open a buy position on the EURUSD currency pair for $1.04515 using a standard lot (which is 100,000 units). With leverage of 1:100 provided by the broker, you can control a position size of $100,000 (1,000 x 100 = 100,000). 

How to Calculate Margin in Trading?

Step 1: Without Leverage, executing this trade would cost you $104,515 (since one standard lot equals 100,000 units, we multiply it by the price of 1.04515 to determine the total position size cost, which amounts to $104,515). However, with a leverage of 1:100, the required margin to open the same trade is reduced to $1,045.15 (calculated as Position size/Leverage = 104,515 /100) to execute the trade.  This demonstrates how the trading leverage allows you to control larger positions with a smaller capital. 

How to Calculate Free Margin in Trading?

Step 2: Once you have entered the trade, the amount of capital remaining in your account available for further trades or withdrawals are known as Free Margin. To Calculate your free margin, you will need 2 figures:

1. Equity: This is your account balance plus any unrealized profit or loss. In this example, let’s assume your equity is $1,500 (calculated as your initial balance of $1,000 plus a $500 profit).

2. Margin: This is the amount reserved for your current trade, which we calculated in Step 1 as $1,045.15.

By subtracting the margin from your equity (1,500 – 1,045.15), you get a free margin of $454.85. This represents the remaining funds you can use for additional trades or withdraw from your account. 

How to Calculate Margin Level in Trading?

Step 3: To be able to know if your account is healthy or not, you need to look at the Margin Level. This is calculated using the same variables as Free Margin (Equity and Margin), but instead of subtracting, you divide Equity by Margin and multiply by 100. For example, if your equity is 1,500 and your margin is 1,045.15, your margin level would be 143.52% (calculated as 1,500 / 1,045.15 x 100). A margin level above 100% is generally considered healthy.

However, if your Margin Level drops to 100%, this is known as a Margin Call. At this point, the account is signaling to either close the losing positions or deposit additional funds to increase your Margin Level.

If the Margin Level falls further to 10%, this is referred to as the Stop-Out Level. At this stage, the trading platform (such as MT5) will automatically start closing your open positions, beginning with the one causing the largest loss, to increase your Margin Level.

In summary:

• A Margin Level above 100% indicates a healthy account.
• A Margin Level below 100% signals that you need to act to avoid further risks.

By monitoring your Margin Level, you can ensure your account remains in good standing and avoid potential Margin Calls or Stop-Outs.

Conclusion

Understanding key concepts like Margin, Free Margin, Margin Level, Margin Call, and Stop-Out is essential for effective risk management in trading. By monitoring these metrics, you can maintain a healthy trading account and minimize your risks.