Using smaller capital to control larger trade positions.
The margin is a percentage of the size of the position and will vary by asset and market conditions.
See Margin formulas below:
What is the definition of Free Margin?
In its simplest definition, Free Margin is the money in a trading account that is available for trading. To calculate Free Margin, you must subtract the margin of your open positions from your Equity (i.e., your Balance plus or minus any profit/loss from open positions). For example, if someone with a Balance of $10,000 were to buy 2 lots of EURUSD at the exchange rate of 1.20000, he would need $240,000 (200,000 X 1.2000). His required margin for this position would be 240,000/50 = $4800. Now, let’s say that the price of EURUSD drops to 1.19050 after he entered the trade. This would mean that he incurred a loss of 0.00950 pips (1.20000 – 1.19050), which is equivalent to $2280 ($240,000 X 0.00950). So, using the Free Margin formula, the trader’s free margin in this case would be Equity ($10,000 – $2280) minus Margin ($4800) = $2920.
What is the definition of Margin Level?
Margin Level indicates how "healthy" your trading account is. It is the ratio of your Equity to the Used Margin of your open positions, indicated as a percentage. As a formula, Margin Level looks like this: (Equity/Used Margin) X 100. Let's say a trader has an equity of $5,000 and has used up $1,000 of margin. His margin level, in this case, would be ($5,000/$1,000) X 100 = 500%. This is a very healthy account! A good way of knowing whether your account is healthy or not is by making sure that your Margin Level is always above 100%.
What is a Margin Call?
A margin call is the term used to describe the alert sent to a trader to notify them that the capital in their account has fallen below the minimum amount needed to keep a position open. A margin call can mean that the trader has to put up additional funds to balance the account, or close positions to reduce the maintenance margin required.
Margin call can also be used to describe the status of your account – i.e., you are 'on margin call' because the funds in your account are below the margin requirement.
When you trade with leveraged products – such as CFDs – there are two types of margin: a deposit margin, needed to open the position, and a maintenance margin, needed to keep the position open. It is the failure to uphold the latter that will trigger a margin call.
If a trade starts to lose money, the funds in your account may no longer be enough to keep the position open and your provider will ask you to top up your account to bring your balance up to the minimum margin – this notification is a margin call. If you top up your funds, the position will remain open. If not, your provider may close the position and any losses incurred will be realized.
The term margin call came from the practice of brokers calling their clients to notify them of the account deficit. But these days, most margin calls are delivered by email.
What is a Stop Out?
A stop out level in forex is a predefined point of 'margin level' whereby a traders' open positions will be closed, to avoid a negative account balance. The margin level % signifies how much equity you have compared to your margin. The use of leverage plays a big role in this, as the more leverage you use, the less margin you are using to secure position(s), leaving more free equity. This is another reason why excessive use of leverage is risky. You can potentially lose more of your equity before reaching stop out, effectively wiping out most of your account.