The margin concepts such as Used margin and Equity have proved to be essential to understand other margin terms. In this lesson, the concept of Margin level too revolves around the terms Used margin and Equity. Without further discussion, let’s get right into the understanding of the Margin level.
Margi level is the percentage ratio of Equity and Used margin. It is a term whose value is expressed in percentage. Also, the meaning of it is closely related to the Free margin.
The margin level determines if the trader can take new positions or not. It is a comparative factor as it is compared with a level set by the brokers. For easy comprehension, note that higher the margin level, higher is the possibility for the trader to take new positions and vice versa. Knowing the margin level is vital because this value has a relation with a Margin call and Stop out level as well.
Calculating Margin Level
The margin level is the ratio of Equity and Used margin expressed in terms of percentage.
Margin level = (Equity / Used Margin) x 100%
Understanding Margin Level
Similar to the Free margin, the Margin level will have no value when there are no positions open. This is simply because there is no margin used. However, when positions are open, the margin level has a non-zero value, which is dependent on the used margin and equity.
As mentioned earlier, the margin level determines if a trader is eligible to take new positions. And this is determined by the level set by the brokers. If the margin level falls below the level set by the brokers, the trader becomes ineligible to take a new position. Usually, the limit set by the brokers is 100%.
Let’s say a trader has deposited $1,000 to their account and has gone long 10,000 units on USD/CAD. Below are the parameters that are to be calculated to determine the margin level:
- Required margin
- Used margin
If the margin requirement for this trade is 2%, the required margin will be,
Required margin = Notional value x Margin requirement = $10,000 x 2% = $200
Since there is only one position running, the value of the used margin will be equal to the value of the required margin, i.e., $200
Assuming the trade is running in a profit of $50, the equity is calculated as follows:
Equity = Account balance + Floating P/L = $1,000 + $50 = $1,050
Now that all the parameters are known, let’s go ahead and calculate the Margin level.
Margin level = (Equity / Used Margin) x 100% = ($1,050 / $200) x 100% = 525%
Now, since the value of the margin level is above 100%, the trader is still eligible to take new positions. This brings us to the end of this lesson on the Margin level. Don’t forget to take the below quiz.