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Margin Trading Jargon Cheat Sheet
Margin
| Term | Definition |
|---|---|
| Margin | Margin is the amount of money you are required to deposit with your trading platform in order to order and maintain positions in the forex market. Margin is used as collateral to ensure you can cover any losses you might incur on your positions. |
Leverage
| Term | Definition |
|---|---|
| Leverage | Leverage is the ability to trade a larger amount with a much smaller amount in your account. |
Unrealized P/L
| Term | Definition |
|---|---|
| Unrealized P/L | Unrealized P/L is the current profit or loss (P/L) held in your open positions. |
| Also Called | – Floating P/L |
Balance
| Term | Definition |
|---|---|
| Balance | Balance is the total amount of cash you have in your trading account. If you have an open position, even if it has a floating profit (or loss), your Balance is still the same as before you opened the position. But once you close the position, the profit (or loss) will be added (or deducted) from the Balance and this will be your new Balance. |
| Also Called | – Account Balance – Cash |
Margin Requirement (Per Position)
| Term | Definition |
|---|---|
| Margin Requirement | Margin Requirement is the amount of margin required to open a position. It is expressed as a percentage (%) of the “full position” size or “Notional Value” of the position you wish to open. |
Required Margin (Per Position)
| Term | Definition |
|---|---|
| Required Margin | Required Margin is the money that is set aside and “locked up” when you open a trade. For example, if you open a $10,000 (mini lot) position, with a Required Margin of 2% (or 50:1 leverage), $200 will be “locked up” during the duration of the trade. This $200 can’t be used to open other positions as long as the trade is open. Once you close the trade, the $200 margin will be “released”. |
| Also Called | – Entry Margin – Initial Margin – Initial Entry Margin – 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 RequirementIf 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 Current |
Used Margin
| Term | Definition |
|---|---|
| Used Margin | Used Margin is the minimum amount of Equity that must be maintained in a margin account. This is the total amount of margin currently in use to maintain open positions. |
| Also Called | – Margin Used – Maintenance Margin Required (MMR) – “Total Margin” |
| How to Calculate | Used Margin is simply the Required Margin for ALL open positions. Used Margin = Total Required Margin for ALL Open Positions |
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Equity
| Term | Definition |
|---|---|
| Equity | Equity is your account balance plus the floating profit (or loss) of all your open positions. Represents the “real-time” value of your account. |
| Also Called | – Account Equity – Net Asset Value – Net Equity |
| How to Calculate | If you have open positions: Equity = Balance + Floating Profit (or Loss)If you do not have any open positions: Equity = Balance |
Free Margin
| Term | Definition |
|---|---|
| Free Margin | Free Margin is the money that is NOT “locked up” due to an open position and can be used to open new positions. When this value is at zero or less the Margin Warning is triggered and additional positions cannot be opened. |
| Also Called | – Free Margin – Available Margin – Usable Margin – Usable Maintenance Margin – “Available to Trade” |
| How to Calculate | Free Margin = Equity – Used Margin |
Margin Level
| Term | Definition |
|---|---|
| Margin Level | Margin Level is the ratio between Equity and Used Margin. It is expressed as a percentage. For example, if your Equity is $5,000 and the Used Margin is $1,000, the Margin Level is 500%. |
| Also Called | – Margin Indicator |
| How to Calculate | Margin Level = (Equity / Used Margin) x 100% |
Margin Call Level
| Term | Definition |
|---|---|
| Margin Call Level | The Margin Call Level is the specific level (%) where if your margin level is equal to or below it, you won’t be able to open any new positions. Your trading platform determines the Margin Call Level. For example, if the Margin Call Level is 100%, this means that if your Margin Level reaches 100%, you won’t be opening any new positions. At this point, your account is now under a Margin Call. Even though most new traders assume this means that their trade(s) may be closed, that’s not true. A Margin Call Level is just a WARNING. |
| Also Called | – Minimum Margin Requirement – Minimum Required Margin |
| How to Calculate | Margin Call Level = Margin Level at X% |
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Stop Out Level
| Term | Definition |
|---|---|
| Stop Out Level | The Stop Out Level is the specific level (%) where if your Margin Level is equal or below it, your broker will automatically start closing your positions until the Margin Level is greater than the Stop Out Level. For example, let’s say the Stop Out Level is 50%. This means that if the Margin Level falls below 50% a Stop Out will automatically occur and the position floating the largest loss will be liquidated automatically. This process will be repeated until the Margin Level increases to a level 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
| Term | Definition |
|---|---|
| Margin Call | A Margin Call occurs when you have breached the Margin Call Level but still above the Stop Out Level. A Margin Call, is a WARNING, telling you that your account isn’t doing too well and that you are close to having your open positions liquidated at market price. You are still allowed to keep your current positions open but you can’t open new positions. |
Stop Out
| Term | Definition |
|---|---|
| Stop Out | A Stop Out, which happens once the Stop Out Level has been breached, is when your open positions will be automatically closed (“liquidated”) by your broker to prevent a negative account balance. EXAMPLE: The trader opens a long position on EUR/USD with a notional value of $100,000. The required margin for this position is $2,000 (2% of $100,000). Now let’s assume the EUR/USD starts moving against the trader, and the position has an unrealized loss of $5,000. This means the trader’s Equity is now $5,000 ($10,000 initial balance – $5,000 loss). The trader’s Margin Level is now 250% ($5,000 Equity / $2,000 Used Margin x 100%). If the broker’s Stop Out Level is set at 50%, then when the trader’s Margin Level falls to 50% or below, the broker will start automatically closing the trader’s open positions. In this example, once the Margin Level hits 50%, the broker will start closing the trader’s EUR/USD position at the current market price to bring the Margin Level back above 50%. This Stop Out liquidation will continue until the trader’s Margin Level is restored to a safe level above the 50% threshold. The key purpose of the Stop Out is to prevent the trader’s losses from exceeding the amount of margin in their account, thereby protecting the broker from potential negative account balances. |