Margin Jargon Cheat Sheet

Margin Jargon Cheat Sheet: Lesson No 43

When you first start in margin trading, it may feel like you’re learning a completely new language. Margin trading, like any other specialized sector, has its own set of phrases and languages to learn.

Consider it a manual for knowing what’s going on with your trading platform. We’re here to make things easier for you. 

|Margin|

DEFINITION:

Margin refers to the initial deposit of funds required by your trading platform to begin and maintain positions in the forex market. This margin acts as a type of security, ensuring that you have the financial resources to pay any losses that may result from your trading operations. In effect, it acts as a guarantee, assuring your trading platform that you have the resources to handle any negative outcomes caused by your positions.

|Leverage|

DEFINITION:

Leverage is the ability to engage in trading activities with a much higher quantity than what is now in your trading account. It allows you to control greater market positions with a fraction of the total amount required. In essence, leverage increases your trading ability, allowing you to potentially improve profits or losses dependent on market movement.

|Unrealized P/L|

DEFINITION:

Unrealized P/L, also known as Floating P/L, is the current profit or loss (P/L) connected with your open holdings in the market. It represents the possible gains or losses that would occur if you closed those holdings at the current market price. The unrealized profit/loss statement fluctuates with market conditions, showing the constantly changing nature of your trading account.

|Balance|

DEFINITION:

Balance, also known as Account Balance or Cash, relates to the total amount of cash available in your trading account at any moment. Even if you have open positions with floating gains or losses, your Balance will remain constant until you decide to close them. When you close a position, any profit or loss is added to or subtracted from your Balance, representing your current financial position in the account.

|Margin Requirement (Per Position)|

DEFINITION:

The specific amount of margin required to open a position in the market is known as the “margin requirement.” It is commonly expressed as a percentage (%) of the Notional Value or the entire position size that you plan to open. By meeting this condition, you may be sure that you have enough money in your trading account to cover any possible position losses. Traders can efficiently limit their risk exposure while participating in a variety of trading transactions by following the margin limitations.

|Required Margin (Per Position)|

DEFINITION:

The required margin refers to the money that is distributed and effectively “locked up” when you make a trade in the market. For example, if you initiate a $10,000 position (known as a micro lot) with a Required Margin of 2% (or 50:1), $200 will be placed aside and unavailable for other trading actions during the trade.

The $200 cannot be used to start additional positions while the transaction is active. However, once you decide to stop the trade, the $200 margin will be “released” and made accessible for future trading reasons. The Required Margin serves as a safety, ensuring that you save enough cash to cover potential losses and complete the tasks related to your trading.

Additionally called:

  1. Entry Margin
  2. Initial Margin
  3. Initial Entry Margin
  4. Maintenance Margin Required (MMR)

HOW TO CALCULATE (PER POSITION):

If the currency of your account and the base currency are the SAME:

Required Margin = Notional Value x Margin Requirement

If the currency of your account is DIFFERENT from the base currency:

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

|Used Margin|

DEFINITION:

The minimal amount of equity needed to maintain a margin account is known as a used margin. It represents the whole margin that is being used to maintain open positions in the account. Used Margin, to put it simply, is the percentage of the account’s equity that is committed to maintaining open trades and guaranteeing that margin needs are met. To prevent margin calls and possible position liquidation, the Used Margin must be kept at a suitable level.

Additionally called:

  1. Margin Used
  2. Maintenance Margin Required (MMR)
  3. “Total Margin”

HOW TO CALCULATE:

All open positions require a margin, and that margin is known as the Used Margin.

Used Margin = Total Required Margin for ALL Open Positions

|Equity|

DEFINITION:

The total of your account balance plus the floating profit or loss related to all of your open positions is referred to as equity. It is a live indication that shows you the current worth of your trading account. Equity gives you a complete picture of your account’s financial situation at any one time by combining the current account balance with the possible gains or losses from open transactions. The Equity changes together with the market, providing information on the health and success of your trading account overall.

Additionally called:

  1. Account Equity
  2. Net Asset Value
  3. Net Equity

HOW TO CALCULATE:

If you have open positions:

Equity = Balance + Floating Profit (or Loss)

If none of the positions are open, then:

Equity = Balance

|Free Margin|

DEFINITION:

The amount of money that is accessible in a trading account that isn’t “locked up” or bound by open positions is known as free margin. It represents the quantity of money available to start new positions or transactions in the market.

A Margin Warning is sent when the Free Margin is zero or below, suggesting that there are not enough funds in the account for opening new positions. Traders cannot create new positions at this time until the Free Margin rises to a point where more trading activity is allowed.

Effective risk management depends on traders being able to monitor their free margin since it allows them to determine how much they can afford to lose and keep their trading within reasonable bounds. 

Additionally called:

  1. Free Margin
  2. Available Margin
  3. Usable Margin
  4. Usable Maintenance Margin
  5. “Available to Trade”

HOW TO CALCULATE:

Free Margin = Equity – Used Margin

|Margin Level|

DEFINITION:

In a trading account, margin level is the ratio of equity to used margin; it is usually stated as a percentage. It is an important indicator to evaluate the risk sensitivity and overall health of the account.

To determine the Margin Level, divide the Equity by the Used Margin. The resulting percentage is then multiplied by 100. For example, if your account has $5,000 in Equity and $1,000 in Used Margin, the Margin Level would be determined as follows:

Margin Level = (Equity / Used Margin) * 100

Margin Level = ($5,000 / $1,000) * 100

Margin Level = 500%

With a 500% margin level, the equity in the account is five times larger than the used margin, protecting against further losses. To prevent margin calls and preserve sufficient trading capacity, traders frequently keep a careful eye on the margin level and make sure it remains above a specific level.

Additionally called:

  • Margin Indicator

HOW TO CALCULATE:

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

|Margin Call Level|

DEFINITION:

The Margin Call Level is the essential barrier, represented as a percentage, below which traders are unable to create new positions. The limit is set by the trading platform and acts as an important risk management tool.

For example, if the Margin Call Level is set to 100%, achieving this level means that traders are unable to open fresh positions. At this point, the trading account enters a condition known as a margin call.

According to common belief, a Margin Call Level is a warning rather than a requirement for the closure of trades. It notifies traders that their account’s margin level has reached a critical point, possibly exposing them to significant risks. 

A margin call encourages traders to reconsider their position and take the required steps to return the account’s margin level to a safer range, even while it does not require traders to immediately close their trades. To prevent more losses, this can involve funding the account, reducing risk by closing positions, or putting risk management techniques into practice.

To trade responsibly and keep control of their accounts while efficiently managing risk, traders have to understand Margin Call notifications and act upon them quickly.

Additionally called:

  • Minimum Margin Requirement
  • Minimum Required Margin

HOW TO CALCULATE:

Margin Call Level = Margin Level at X%

|Stop Out Level|

DEFINITION:

The Stop Out Level is a percentage that indicates the essential limit, at which brokers automatically start to close trader positions until the Margin Level rises above the Stop Out Level.

Assume, for example, that 50% is the Stop Out Level. In this case, a Stop Out event will occur if the Margin Level drops to 50% or below. As a result, the broker will begin closing trades, beginning with the trade with the highest floating loss.

Repeatedly, this liquidation process continues until the Margin Level exceeds the set stop-out level of 50%. Brokers have implemented the Stop Out mechanism to shield themselves and traders from significant losses that could arise from insufficient margin levels. 

Additionally called:

  1. Liquidation Margin
  2. Margin Closeout
  3. Margin Close Out (MCO)
  4. Minimum Required Margin

HOW TO CALCULATE:

Stop Out Level = Margin Level at X%

|Margin Call|

DEFINITION:

Let’s say that while driving a car, a warning light appears on the dashboard. That is similar to a trading Margin Call. You’re being informed, “Hey, your account isn’t doing so great right now.”

The issue is, though, that you are still able to drive your automobile and continue with your open positions in trading after receiving this notice. But it’s like the warning light on your automobile warning you of the fact that you shouldn’t go too fast or take any risks right now.

Therefore, you are not permitted to initiate any new transactions during a Margin Call. It’s similar to being instructed to stop driving until the issue producing the notice is fixed.

But keep in mind that a margin call is simply a warning. The world won’t end because of it. It’s a warning to use precautions and possibly make some adjustments to safeguard your account.

|Stop Out|

DEFINITION:

A Stop Out is a trading scenario in which open positions are automatically closed, or “liquidated,” to prevent the trading account from falling into a negative balance. This happens when the Stop Out Level, a specific limit set by the broker, is exceeded due to insufficient margins. The Stop Out method serves as a safeguard to prevent traders’ accounts from resulting in more losses above a particular limit.