Tag: Margin Account

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Forex Course

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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26. Margin Terminologies – Unrealized P/L and Realized P/L

Introduction
In the previous lesson, the concept of balance was discussed. And in this lesson, two more terms shall be opened up, namely, unrealized P/L and realized P/L. First up

Introduction
In the previous lesson, the concept of balance was discussed. And in this lesson, two more terms shall be opened up, namely, unrealized P/L and realized P/L. First up

Introduction

In the previous lesson, the concept of balance was discussed. And in this lesson, two more terms shall be opened up, namely, unrealized P/L and realized P/L. First up, P/L is an abbreviation for Profit/Loss. Many assume that there is only one type of P/L, but this is not true. Not just in forex, in other markets as well, there exists both unrealized and realized P/L. Now, let’s begin with understanding each term with the help of examples.

Unrealized P/L

Unrealized P/L, as the name clearly suggests, is the profit or loss running in a trade that is not closed. The profit/loss in unrealized P/L constantly changes as the prices keep changing. Hence, this type of P/L is also referred to as Floating P/L.

The Unrealized P/L is calculated as follows:

❖ Unrealized P/L = Position size x (CMP – Entry price)  [Long]

❖ Unrealized P/L = Position size x (Entry price – CMP)  [Short]

(CMP – Currency Market Price)

This above formula gives the value in terms of pips. The value in terms of currency can be calculated by multiplying it with the pip value of the currency pair.

Example – Unrealized P/L or Floating P/L

Let’s assume a trader bought 10,000 units of EURUSD at 1.4100. After a while, the price rises to 1.5000. If the trade is still running, the floating P/L can be determined, as shown.

Since this is a long trade, the following formula is applied.

Unrealized P/L = Position size x (CMP – Entry price)

= 10,000 x (1.6100 – 1.5000)

= 10,000 x (0.11)

Unrealized P/L = 1,100 pips

Hence, the trade is currently running at a profit of 1,100 pips.

Now, if the pip value for a mini lot for EURUSD is $1, the profit sums up to $1,100 (1,100 x $1).

Now, bringing the concept of balance into the picture, the balance for unrealized P/L will not get affected though the trade is in profit or loss. However, once the trade is closed, the balance does get updated.

Realized P/L

Realized P/L is the profit or loss in a trade when it closed. Realized P/L is more significant than the unrealized P/L because this is the one that brings a change to the account balance.

The realized P/L can be calculated using the below formula:

❖ Realized P/L = Position size x (Closing price – Entry price)  [Long]

❖ Realized P/L = Position size x (Entry price – Closing price)  [Short]

Example – Realized P/L

Let’s say a trader went long on EURUSD with 10,000 units at 1.1000. The price drops down to 1.0000. Since the current market price is lower than the entry price, it can be ascertained that the trade is running in a loss, i.e., the unrealized P/L would be negative. Later, the price jumps up to 1.2000. At this point, the trader closes the trade. Since the trade is now closed, the realized P/L can be calculated as follows.

Realized P/L = Position size x (Closing price – Entry price)

= 10,000 x (1.2000 – 1.1000)

Realized P/L = 1,000 pips

In terms of currency value, the realized P/L will be $1,000 (1,000 pips x $1). And this time, the balance will be updated as well.

Hence, this begins us to the end of this lesson. In the next lesson, another important margin terminology shall be discussed. Before you go, make sure to take the below quiz to know if you have got the concepts right.

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25. Margin Terminologies – Balance & Rollover

In the previous lesson, we have understood the fundamentals of margin/leverage trading. In this lesson and the following few lessons, we shall be discussing different terms related to margin and

In the previous lesson, we have understood the fundamentals of margin/leverage trading. In this lesson and the following few lessons, we shall be discussing different terms related to margin and

In the previous lesson, we have understood the fundamentals of margin/leverage trading. In this lesson and the following few lessons, we shall be discussing different terms related to margin and margin account. And in this lesson, we will primarily talk about balance and also a brief description of the concept of rollover in Forex.

What is Balance?

Balance is the most basic term used in any type of account. Be it a regular savings account, a Demat account, or a margin account. The meaning of balance remains the same in the margin account as well, just like other account types.

Balance in a margin trading account is the amount of capital deposited by the user to his/her trading account. For example, if a trader deposits $1,000 to their margin trading account, then their balance would be equal to $1,000. This is the amount used for taking positions in the market. Apart from that, it is used up for other stuff as well, which will be discussed in the next sections of this article.

Another vital point to note here is that the balance amount is not affected when a trader enters a trade or when a position is open. The balance gets updated only after the trade is closed (rollover fee is an exception).

When does the balance gets affected?

The balance in a margin account is affected in the following ways:

  • When cash is deposited to the margin account.
  • When an open position is squared off (closed).
  • When open positions are kept overnight, so, though positions are open, funds will be debited from or credited to the margin account. And this fee is referred to as the rollover fee. 

What is Rollover in trading?

The concept of rollover is not a term that comes under a margin account. However, since this term is closely related to balance, it shall be discussed in this lesson.

As the name pretty much suggests, rollover is the process of shifting an open position from one trading day to another. This is a process that is done automatically by the brokers. As far as the internal working of rollover is concerned, the brokers close a position at the end of the trading day and simultaneously open a new position (at the closing price) the next trading day.

For this rollover to be done, brokers charge a fee called ‘swap.’ This is where the balance comes into the picture, as swap brings a change to the balance. Note that swap happens in both ways, i.e., it can be debited from as well as deposited to the user’s account balance. The interest rates of the currencies are the ones that determine if the swap is to be credited or debited. In simple words, If you are paid swap, the money will be credited to your account balance. Conversely, if you are charged swap, the money will be debited from your account balance.

This concludes the lesson on balance in a margin account. In the upcoming lesson, we shall be discussing two more terminologies related to Margin Trading. Don’t forget to take up the below quiz!

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24. Fundamentals Of Margin Trading

Introduction
Margin, which allows for Leverage trading, is one of the crucial reasons why most of the traders prefer trading Forex. It is an aggressive form of trading where traders

Introduction
Margin, which allows for Leverage trading, is one of the crucial reasons why most of the traders prefer trading Forex. It is an aggressive form of trading where traders

Introduction

Margin, which allows for Leverage trading, is one of the crucial reasons why most of the traders prefer trading Forex. It is an aggressive form of trading where traders take more risk while expecting an additional reward. Here, traders increase their bet by borrowing funds usually from their brokers. Thereby leverage trading allows a trader to trade with more funds than they actually have in their account. Leverage trading exists in the stock market, as well. The internal working of margin in both the markets is not quite the same, but the overall concept is the same.

Leverages is typically represented in ratios or with an ”X” next to it. For instance, the notation of two times leverage would be 2:1 or 2x. There are several other terminologies such as balance, realized and unrealized P/L, used margin, equity, etc. which are involved in margin trading. And to trade in a margin account, having knowledge about these terms is vital. So, in this lesson, some basic concepts and working of the margin trading shall be discussed.

Margin Account

A margin account, also referred to as a leverage account, is a trading account offered by a forex broker, which lets their clients trade large quantities without investing the total required amount. In a margin account, the forex broker acts like a loan lender who lends cash to its customers for taking positions in the market.

How does margin trading work?

Let us assume that a trader has deposited some amount into his account. The broker sets a margin percentage for the client. This margin percentage typically is between 1-2%. In forex, it is not the case that this account balance is used for taking a position. But, it is used up by the brokers as security deposits. Here, if the broker sets a margin percentage to 1%, then 1% of the trade value is utilized by the broker as a security deposit. So, a trader takes a position worth $100,000, then only $1,000 is used up, and the broker lends the rest 99% of the amount. This is the basic working of a margin account. There are many other terms involved in it, which shall be discussed in the subsequent lessons.

Benefits and Shortcomings of Leverage Trading

Initially, margin trading might seem very beneficial. To an extent, this is true, but there are disadvantages to it as well. Below are some of the advantages and disadvantages of margin trading.

Advantages

🟢 Ability to multiply a trader’s trade size

With margin trading, minimal capital is no more an issue because one can take larger positions even with a smaller investment.

🟢 Significant short-term gains

As margin accounts allow traders to take bigger positions, one can grow their account balance exponentially, even in the short-term.

Disadvantages

🔴 High risk

The market has two directions. So, though a trader trades on a margin, it does not mean that the trade will perform in their forecasted direction. A trader can make high profits and can even lose a significant amount of money. Hence, trading with margin involves high risk. And it is not recommended for novice traders.

🔴 The requirement of the minimum account balance

Trading in a margin account requires the user to maintain the minimum balance specified by the broker. If a user fails to maintain the minimum balance, then the trader is forced to close their positions.

This concludes the introduction of margin trading. In the next lesson, the terminologies involved in margin trading shall be discussed.

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