Ever wondered what margin level meant? This is one of those topics that although super important, many traders; especially beginners find it confusing. In this ultimate guide, I will explain all of the specifics about margin level in forex trading and how to avoid it with margin calls. After all, in addition to explaining that margin calls can occur when the account is on marginal status and providing you with some good ideas for maintaining your Margin Level unharmed, we will also talk about how to keep your Money management at its best.

Key Concepts Explained

1. What is Margin Level?

It is a percentage that represents the ratio of your equity to your used margin. It’s calculated using the following formula:
        Margin Level = (Equity / Used Margin ) x 100%                                                      

For instance, if your equity is $10,000 and your used margin is $2,000, your margin level would be:

                                (10000 / 2000) x 100% = 500%

This level of high margin shows that you have an adequate amount of funds as compared to the used margin and with this, one can be able to open more positions or even withstand market changes.

2. What is Margin?

Margin is simply financing for you to open positions leveraging on your trading balances. It acts as a kind of safety deposit to insure your trade-in forex trading. The broker reserves this sum from your account balance in the case of losses.

3. What is Equity?

Equity is the total value of your trading account including deposit and some unrealized profit/loss from open positions. Your equity changes in real-time as the market conditions change, and your margin level depends on how much you have invested.

4. What is Used Margin?

Used Margin is that part of your account that helps the trader to keep open their trades with assistance or support as leverage from the broker. It affects your margin level because it shows how much margin is being used at the point.

Relationship Between Equity, Margin, and Margin Level

It is important to remember the relationship between equity, margin, and your account’s risk as a whole. Your margin level decreases along with your equity when you have losing trades, thus bringing the trader closer to a capital lockout. On the contrary, growing equity (as a result of profitable trades) increases your margin level to provide you more freedom in trading.

How Does Margin Level Work in Forex Trading?

1. How Margin Level Affects Forex Trading

The margin level itself is used as part of a formula to determine the amount of equity you have left after opening or holding current positions and it can directly affect how much new leverage is given by position. When it is high, it provides you with some breathing space, while a low one means that your positions are likely to be closed by the broker.

2. How Brokers Use Margin Level

Margin levels are a tool used by brokers to limit risk. The usual practice is to set a floor level, which is typically 100%. Should the margin value reduce to below that figure, your broker is going to send you a margin call to add more money or to close some of the positions. This is how they Ensure that they deal with the right broker and at the same time, help to filter those who want to open an account to trade mere goods.

Examples of Margin Level in Action

Let’s explore two scenarios to illustrate how it works in real-life trading situations.

1. High Margin Level

Suppose you have an account with $10,000 equity and $1,000 used margin. Your margin level is:

                                 (10000 / 1000) x 100% = 1000%

This shows that you earn a higher amount of money per point than the cost made by using the margin with this you have high equity relative to used margin and hence can open more positions or remain flexible to changes in market conditions.

2. Low Margin Level

Now, imagine that due to some losing trades, your equity drops to $2,000 while your used margin remains at $1,000. Your margin level is now:

                                      (2000 / 1000) x 100% = 200%

This lower level signals that you are closer to a margin call and may need to take action to avoid further losses.

Differences Between Margin Level and Margin Call

• Margin Call: A margin call occurs when a broker sends their client to demand an additional deposit or some positions should be closed that makes it sufficient. It is even activated when your margin level drops to a certain point, which in most cases is 100% again.
• Margin Level: This is a real-time measure of the state of your account, that is, the relation between equity and used margin.

Strategies to Avoid a Margin Call

To avoid margin calls, consider the following strategies:

• Regular Monitoring: This implies that you need to keep track of your marginal level of profit and go over it from time to time especially when the market is unpredictable.
• Use Stop-Loss Orders: Employ the application of stop-loss order on your trades to avoid having equity draw down on your trades in the cases where the price action is the reverse of your expected trend.
• Avoid Over-Leveraging: Do not use high leverage when investing in the forex market because this can very quickly eat into the traders’ margin.
• Diversify Your Trades: Finding ways to spread your risks across the various trades you undertake including the markets and approaches you take in the trade.

Common Mistakes Traders Make 

1. Misunderstanding the Calculation

Incorrect understanding of the calculation is one of the most widespread mistakes among traders. This can cause traders to become too cocky in their trading and eventually, they may face margin calls.

2. Trading Positions

As this example demonstrates, some traders can be insensitive towards their margin level when opening new positions causing them to eventually become overly leveraged. Such neglect can eat rapidly through the shooter’s margin, resulting in a smelly of the dreaded margin call.

3. Overleveraging and Its Consequences

There is also risk a factor, that overleveraging comes with Forex trading. Overleveraging can leave traders with a margin level that is so low they are at risk of being liquidated by the broker.

Frequently Asked Questions

1. What is a safe margin level to keep on forex trading? 

A safe margin level should not be less than 100%. However, while beginning on a trading journey, it is recommended to keep it above 200%. This is because such a high margin level reduces the risks of margin calls as one can manage their trades more comfortably without the pressure to top up a position or withdraw to maintain them.

2. How can I increase my margin level? 

Maximum your margin level by closing all losing positions, depositing into your trading account, or reducing your lot sizes to reduce the leverage to keep it rising. Alternatively, some would opt to increase the size or reduce the frequency of your trades to avert leveraging which might result in to slow drawdown of your funds giving time to increase your margin level.

3. What do I do if my margin level falls to less than 100? 

If your margin level falls less than 100%, your brokerage will send you a margin call. If you do not exceed, they will automatically close all you are open position at a loss to avert further potential loss.

4. How is Margin Level Different from Free Margin?

Margin level is the proportion of equity to used margin while free margin is the equity amount that one can use to open a new trade. Free margin reduces as the used margin increases. Therefore, free margin is the amount of equity that one has not yet used while margin level refers to the overall safety factor.

5. Can My Account Go Negative If My Margin Level is Low?

While most brokers have mechanisms in place to prevent your account from going negative, in extreme market conditions, it is possible to lose more than your account balance if your margin level is low and the market moves rapidly against your positions.