What Is the Margin Level and Why Is It Important for You?
Margin level is the amount of a trader's account size in relation to the required margin to maintain open positions. The margin level is expressed as a percentage and is important for all traders to understand.
The margin level is calculated with the following formula:
Margin level = (account equity / required margin) * 100
Account equity is the total balance of a trader's account, with both profits and losses.
Margin, on the other hand, refers to the amount needed to initiate and support open positions.
How to understand the margin percentage?
When the margin level is high, it indicates that the trader has a greater account equity balance relative to the required margin, which safeguards against potential losses.
Conversely, a low margin level means that the trader has a smaller account equity balance compared to the required margin, making the account more susceptible to losses.
When the margin level lowers…
When the margin is lower than it is acceptable by the broker’s trading terms, a client may receive a margin call. If your account gets a margin call, follow these steps:
- Check the margin and the margin level required to maintain open positions.
- Evaluate the situation (open trades and available balance) and estimate the risks for future monitoring.
- Take immediate action to minimize risks and avoid further losses. Increase the deposit in the account or close some open positions to reduce the required margin.
- Learn from the experience, evaluate the reason behind the margin call, and identify the actions that can be taken to avoid it in the future.
Why does a margin call happen?
There are some common mistakes that traders make when trading on margin. Here are the most popular ones:
Trading with a large size. Some traders believe that trading with a large size will lead to greater profits, but this increases the potential risk of loss and exposes the account to the risk of margin call.
Relying on high leverage. Relying on high leverage can potentially increase profits, but this increases the potential risk of margin and exposes the account to risk.
Not using stop-loss orders. They are necessary for risk management when trading on margin. However, some traders ignore placing stop-loss orders, which increases the potential risk of loss.
Relying solely on technical analysis. Without considering important economic and political events, you may make incorrect decisions.
Trading without a strategy. It increases the potential risks and makes it difficult to achieve stable profits.
Not monitoring margin levels regularly. Traders should monitor margin levels regularly to determine the strength of their accounts and avoid margin calls.
Learn more about the margin call and stop-out in our article.
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