Tag: Equity

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32. Understanding Stop Out Level In Margin Trading

Introduction

Introduction

Introduction

In the last lesson, we saw how Margin Level was found to be useful for giving meaning to Margin Call Level. Similar to the previous lesson, in this lesson, we shall be discussing another term that involves the dependency of the Margin Level. This lesson will be dealing with the understanding of what Stop Out Level is and also the implications and consequences of it.

Stop Out Level, and Margin Call Level have almost got the same meaning. There is only a thin line difference between these two. Hence, understanding the Margin Call Level is critical to comprehend Stop Out Level.

What is Stop Out Level?

Stop Out Level is a level that is set by the brokers, which triggers them to take action when the Margin Level falls below this specified level (Stop Out Level). That is, when the Margin Level breaks below the Stop Out Level, the broker forcibly closes some of the trader’s position, usually without their consent. The positions are liquidated because of the unavailability of the margin in the account.

Before the broker closes the positions, the trader is first intimated that their Margin Level has significantly reduced and is at risk. This intimation is called Margin Call. If the Margin Level falls much more than the Margin Call Level and goes below the Stop Out Level, the positions are liquidated. And this process of liquidation is called Stop Out.

The complete flow to Stop Out

If we were to dig deeper, the dependency of Stop Out level drops down to the basic concepts like Balance, Margin, Floating P/L, etc.

For instance, when a trader takes a position, the above terms come into action. If the trade is in profit, the floating P/L increases, and there are no worries about the margin call and stop out as the margin level would be considerably higher than the margin call level and the stop out level. But, if the trade is running in the negative, eyes must be on the margin call level as well as stop out level. Let’s get this point clearer, with an example.

Let’s say a trader has deposited $1000 into his account and has used $200 for taking few positions. Consider the Stop Out Level to be at 20%.

If the trades are running in a loss of$970. The equity for this is calculated as:

Equity = balance + floating P/L = $1,000 + (-$970) = $30

Similarly, the margin level will be,

Margin level = (Equity/used margin) x 100% = ($30 / $200) x 100% = 15%

Now, since the margin level has gone below the stop out level, the positions are scratched off. So, the trader will have booked a loss of $970. And the newly updated balance will be $30.

This brings us to the end of this lesson on Stop Out Level. Also, this completes all the terminologies that are involved in Margin Trading. Take the quiz below and stay tuned to learn a different lesson tomorrow. Cheers!

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30. What Is Margin Level and How Is It Calculated?

Introduction
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

Introduction
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

Introduction

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.

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%.

Example

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
  • Equity
Required 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

Used Margin

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

Equity

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

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.

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29. Other Important Margin Trading Terminologies – Free Margin

Introduction
In the previous lesson, the concept of used margin and equity was discussed. Apart from having their importance, these terms prove to be significant to understand other terms as

Introduction
In the previous lesson, the concept of used margin and equity was discussed. Apart from having their importance, these terms prove to be significant to understand other terms as

Introduction

In the previous lesson, the concept of used margin and equity was discussed. Apart from having their importance, these terms prove to be significant to understand other terms as well. And in this lesson, we will be dealing with a term that has a close relation with used margin and equity.

Just to brush things up, the used margin is basically the total amount of money that is used up by the broker for all the positions. In other words, it is simply the sum of the required margin for all the trades. And equity, on the other hand, is the sum of the account balance and the unrealized P/L. Now that these definitions are clear let’s understand what free margin is.

Free Margin

Free margin is the difference between the Equity and the Used margin. That is, Free margin is the amount that is available for the trader to take new positions. It is basically the complemented version of the Used Margin. Used margin is the margin that is locked by the broker for taking positions, while free margin is the margin that can be utilized to open new positions. Free margin is also referred to as available margin, usable margin, and usable maintenance margin.

Calculation of Free Margin

As already mentioned, the Free margin is calculated by finding the difference between Equity and Used margin.

Free Margin = Equity – Used Margin

In the previous lesson, it was discussed that equity changes continuously when any positions are open. Now, since Equity is one of the factors that determine the Free margin, the free margin also keeps constantly changing when positions are running.

So, when a trade is performing well, the floating P/L increases, which in turn increases the Equity as well as the Free margin. And conversely, the Free margin decreases when the floating P/L decreases.

Now that the formula is clear let’s understand it better with some examples.

Let’s say a trader has deposited $1,000 to their account and currently has no positions open yet. So, the account balance at this point would be $1,000. The Equity will be the same as the account balance as the floating P/L is $0. Since no trades are open, there is no margin used. From this, the free margin is calculated as:

Free Margin = Equity + Used Margin = $1,000 + $0 = $1,000

Thus, it can be concluded that Balance, Equity, and Free margin is the same when no positions are open.

Now, let’s say the trader went short 10,000 units on EUR/USD. Consider the required margin to be $150. Also, assume that the trade is running in a profit of $30.

Equity= Account balance + Floating P/L = $1,000 + $30 = $1,030

The used margin will be equal to $150 (required margin) as there is only one position open.

Free margin = Equity – Used margin = $1,030 – $150 = $880

We hope you understood what Free margin refers to in a margin account. In the coming lessons, we will be discussing the Margin level, Margin call level, and Stop out level. Check your learnings by taking up the below quiz.

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28. What Should You Know About Used Margin and Equity

Introduction
In the previous lesson, three terms related to margin was discussed. There is another term called used margin, which comes under the same roof of the margin requirement and

Introduction
In the previous lesson, three terms related to margin was discussed. There is another term called used margin, which comes under the same roof of the margin requirement and

Introduction

In the previous lesson, three terms related to margin was discussed. There is another term called used margin, which comes under the same roof of the margin requirement and required margin. And in the lesson, this term shall be discussed in detail. Apart from that, this lesson shall touch base on the concept of Equity in margin trading.

Before diving directly into the topic, let’s first brush up the previously discussed terms as they form the base for this lesson. To Start off with the Required Margin, it is basically the units of currency that is needed to open a position. Note that this is not the actual amount of the position size but the amount after applying the Margin Requirement to the required margin.

Used Margin

The Used margin is the term that is very similar to the required margin. In fact, the used margin is the required margin. However, there is a thin line difference between the two.

The Used margin is the amount that is blocked by the broker when positions are open on a trader’s account. This definition might seem the same as that of the required margin. The difference is that the required margin talks about one single trade, while the used margin considers the sum of the required margin of all the trades. This is the amount that is ‘used’ by the broker when the trade is open and cannot be utilized for taking new positions. However, once the positions are closed, this used margin is unblocked and returned to the account balance.

Example

Let’s say a trader has $1,000 in his account and wishes to open trades on EUR/USD and USD/CHF.

Let’s assume he is willing to go short 10,000 units on USD/CHF and long 1,000 units on EUR/USD. Let’s keep the margin requirement for USD/CHF and EUR/USD to 2%, respectively. Before going into the calculation of the used margin, the required margin is calculated as follows:

USD/CHF

Required margin = Notional Value x Margin Requirement = $10,000 x 0.02 = $200

EUR/USD

Required margin = Notional Value x Margin requirement = $1,000 x 0.02 = $20

Therefore, when positions on both trades are opened, the used margin turns out to be $220*.

*Used margin = $200 + $20 = $220

Equity

Equity is a variable term that represents the current value of the account balance. Equity constantly changes when traders have their positions running. This proves to be an important term because it determines how many more positions can be taken on this account.

Calculation of Equity

The calculation of Equity is simple. It is the algebraic sum of the account balance and the unrealized P/L. When there are no positions open, the Equity will be the same as the account balance as the unrealized P/L is 0. And when there are any running positions, the Equity will be determined by both account balance and unrealized P/L.

Equity = Account Balance + Floating P/L

From this, it can be inferred that, when trades are running in the positive, the Equity rises, and when they’re in the negative, the Equity drops.

Thus, this completes the lesson on Used Margin and Equity. In the next lesson, some advanced term on margin shall be introduced. Don’t forget to take the below quiz before you move on.

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