Margin Trading Terminology Reference!

As you delve into the world of margin trading, you may encounter a unique set of terminology and jargon that can initially seem daunting. Similar to any specialized field, margin trading comes with its own lexicon. Here's a helpful cheat sheet to assist you in understanding the most common terms you may encounter within your trading platform.

Margin

Margin refers to the sum of money that you must deposit with your trading platform to initiate and maintain positions in the forex market. This margin serves as collateral, ensuring your ability to cover potential losses incurred in your positions.

Leverage

Leverage represents the capacity to trade a more substantial sum with a significantly smaller amount in your trading account.

Unrealized P/L

Unrealized P/L, also known as Floating P/L, denotes the current profit or loss (P/L) associated with your open positions.

Balance

Balance stands for the total amount of cash present in your trading account. Even if you possess open positions, including those with floating profits or losses, your Balance remains unchanged.

However, upon closing a position, any resulting profit or loss is added to or deducted from the Balance, thus establishing your new Balance. This term is also referred to as Account Balance or simply Cash.

Margin Requirement (Per Position)

Margin Requirement indicates the margin amount necessary to open a position. It is typically expressed as a percentage (%) of the "full position" size or "Notional Value" of the desired position.

Required Margin (Per Position)

Required Margin is the capital set aside and temporarily "locked up" when you initiate a trade. For example, when opening a $10,000 (mini lot) position with a Required Margin of 2% (equivalent to 50:1 leverage), $200 becomes temporarily unavailable for other trading purposes as long as the position remains open.

Upon closing the trade, this $200 margin is "released." Other synonymous terms include Entry Margin, Initial Margin, Initial Entry Margin, and Maintenance Margin Required (MMR).

HOW TO CALCULATE (PER POSITION):

If the base currency is the SAME as your account's currency:

• Required Margin = Notional Value x Margin Requirement

If the base currency is DIFFERENT from your account's currency:

• Required Margin = Notional Value x Margin Requirement x Exchange Rate Between Base Currency and Account Currency

Used Margin

Used Margin represents the minimum Equity amount that must be maintained within a margin account. It signifies the total margin currently allocated to sustain open positions. It is also known as Margin Used, Maintenance Margin Required (MMR), or "Total Margin."

HOW TO CALCULATE:

Used Margin is straightforwardly the sum of Required Margin for ALL open positions.

• Used Margin = Total Required Margin for ALL Open Positions

Equity

Equity refers to your account balance in addition to the floating profit or loss from all your active positions. It mirrors the real-time value of your account. Synonyms for Equity include Account Equity, Net Asset Value, and Net Equity.

HOW TO CALCULATE:

If you possess open positions:

• Equity = Balance + Floating Profit (or Loss)

If your account has no open positions:

• Equity = Balance

Free Margin

Free Margin represents the funds that are not tied up due to open positions and can be utilized to initiate new positions. When this value reaches zero or falls below, it triggers a Margin Warning, and further position openings are prohibited.

ALSO CALLED:

• Free Margin
• Available Margin
• Usable Margin
• Usable Maintenance Margin
• "Available to Trade"

HOW TO CALCULATE:

• Free Margin = Equity - Used Margin

Margin Level

Margin Level is the proportion of Equity to Used Margin, expressed as a percentage. For instance, if your Equity is $5,000, and the Used Margin is $1,000, the Margin Level stands at 500%.

ALSO CALLED:

• Margin Indicator

HOW TO CALCULATE:

• Margin Level = (Equity / Used Margin) x 100%

Margin Call Level

The Margin Call Level is a specific threshold (%) where, if your margin level equals or falls below it, you are unable to open new positions. The Margin Call Level is determined by your trading platform.

For instance, if the Margin Call Level is set at 100%, it means that once your Margin Level reaches 100%, new position openings are prohibited, indicating that your account is in a Margin Call status.

However, it's essential to note that reaching the Margin Call Level doesn't lead to the automatic closure of your trades; it serves as a warning.

ALSO CALLED:

• Minimum Margin Requirement
• Minimum Required Margin

HOW TO CALCULATE:

• Margin Call Level = Margin Level at X%

Stop Out Level

The Stop Out Level is another specific threshold (%) where, if your Margin Level equals or drops below it, your broker will initiate the automatic closure of your positions until the Margin Level surpasses the Stop Out Level.

For example, if the Stop Out Level is 50%, it means that once the Margin Level falls below 50%, an automatic Stop Out will commence, beginning with the position incurring the largest loss. This process continues until the Margin Level rises above 50%.

ALSO CALLED:

• Liquidation Margin
• Margin Closeout
• Margin Close Out (MCO)
• Minimum Required Margin

HOW TO CALCULATE:

• Stop Out Level = Margin Level at X%

Margin Call

A Margin Call takes place when you have breached the Margin Call Level but remain above the Stop Out Level. It serves as a warning sign, indicating that your account is not performing well, and your open positions are at risk of being liquidated at market price. While you can still maintain your existing positions, opening new positions is restricted.

Stop Out

A Stop Out occurs once the Stop Out Level has been breached. During a Stop Out, your open positions are automatically closed or "liquidated" to prevent a negative account balance.