We now know that Margin is the amount of money or capital needed by an investor to open a trade. Essentially these funds are ‘locked’ in the trading platform when a trade is opened and are released when a trade is closed.
We also know that the Margin level expressed in the trading platform as a percentage gives the investor an indication of the ‘health’ of their trading account as it shows the ratio of Equity to used Margin.
Whilst trading on Margin enables investors to potentially profit on positions far larger than their deposited capital, it also comes with the risk of larger losses.
Because we want to protect your investments, we use a Margin call as an indicator that you are close to losing all your capital. If the Margin level displayed on the MT4 platform reaches 80%, then your trading account is low on funds.
Let us have a look at an example:
An Investor has a trading account with a balance of 10,000 USD, they open a trade that requires a margin of 1,000 USD.
Assuming the trade moves against them resulting in an unrealized loss of -9,000 USD, their Equity will now be 1,000 USD.
Now we know the used Margin and Equity of the account we can calculate the Margin Level using the formula:
Margin Level is: (Equity/Margin) x 100.
Equity = 1,000 USD
Margin = 1,000 USD
So, the Margin Level = (1,000/1,000) x 100 = 100%
If the trade continued to move against them by an additional -200 USD, their unrealized loss would now be -9,200 USD leaving an Equity of 800 USD, the margin level would now be as follows:
Equity = 800 USD
Margin = 1000 USD
Margin Level = (800/1,000) x 100 = 80%
Because the Margin Level has now reached 80%, a Margin Call is triggered in the trading platform to alert the investor that they are close to losing all their Capital. At that point they can:
• Take no action
• Top-up the account
• Close some of the open positions, to free more capital
If no action is taken by the investor and the market continues to move against the position, a Stop-Out will be triggered at a Margin Level of 50%.
To understand what a Stop-Out is have a read through the Traders Trust education blog section where you will find a dedicated article.