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What is Margin Level?

Whether you are a seasoned and experienced Investor or Trader, or perhaps you are completely new to CFD trading and are just starting out, a very important concept in trading and trade management is understanding and managing the Margin Level in the trading terminal and using this to control and monitor your trades.

Simply put, Margin Level is the relationship between the Equity and the used Margin of the trading account. Expressed as a percentage, the formula used to calculate the margin level is: (Equity/Margin) x 100.

So, why is understanding the Margin Level so important?

The Margin level which is shown in the ‘Trade’ tab of the ‘Terminal’ window in the MT4 trading platform, gives you an indication of how many times the current capital you have (including open trades) is covered by the money you paid to open your trades (required margin).

As CFD trading requires a margin deposit to open transactions, the more trades that are opened in the trading account, the more capital is used up to open these trades. This reduces the number of available funds to open new trades or keep the existing ones open on the market.

As trades are closed in the trading account, Margin is freed up and this will increase the Margin Level on the account.

The Margin level is often referred to as it gives an indication of the ‘health’ of the trading account. A Margin Level of 0% means that there are no open trades on the account, whereas a Margin Level of 100% means that the Equity and the used Margin on the account are equal.  The only money left in your account is the margin deposited to open the trades. It’s a sign that you don’t have much money left to keep trades open on the market, which may result in the trades being closed, as the funds in your account (Equity) reach close to 0.

If the Margin Level drops below 100%, you are running low on funds; therefore, you can no longer open new trades. In such situations to increase the Margin Level, you can [MI6] deposit more funds, leave the trades to run in case the market goes in your favor, or close some trades to release the margin deposit and support the remaining trades on the market for a while longer.

Now, to help us better understand the Margin Level, let us 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.  At this point, the account will display:

Balance = $10,000

Margin = $1,000

Free Margin = $ 9,000 and changing based on the profit or loss of the open trades

Equity = $10,000 and changing based on the profit or loss of the open trades

Margin level = 1000%

If the market moves against them and their Equity becomes $1,000, then the margin level will be calculated as follows:

Margin Level = (Equity/Margin)*100

Equity = $1,000

Margin = $1,000

Margin Level = (1,000/1,000)*100 = 100%

At this stage, you need to keep a very close eye on your trading account, as you’re close to a Margin call. Until the Margin level increases above 100%, you will no longer be able to open new trades as not enough money is available in your account.

What happens if my Margin Level continues to fall below 100%?

To help protect your investments when the Margin Level reaches 80%, we use a Margin Call as an indicator that you are close to losing all of your capital. We will address what a Margin Call is and why it occurs in the following article.