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Margin Jargon Cheat Sheet

Writer: K9 InvestmentsK9 Investments
Oct 29, 20246 min read

Updated: Nov 1, 2024


Level-1 Module-6 Chapter-16


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As you delve into the world of margin trading, you may feel overwhelmed by the specialized term inology. Just like any niche area, margin trading comes with its own set of jargon. This cheat sheet will help you navigate the most common terms you'll encounter on your trading platform, allowing you to trade with confidence and clarity.


What is Margin?

Definition:Margin refers to the amount of money you need to deposit with your trading platform to open and maintain positions in the forex market. It serves as collateral to ensure you can cover potential losses on your trades.


Why is Margin Important?

Margin allows traders to control larger positions than they could with just their available cash. This leverage can amplify both gains and losses, making it crucial for traders to understand how to manage their margin effectively.


Understanding Leverage

Definition:Leverage is the ability to trade a larger position size with a smaller amount of capital in your account. It enables traders to amplify their exposure to the market without needing to invest the full amount upfront.


How Does Leverage Work?

For example, with a leverage ratio of 50:1, you can control a position worth $50,000 with just $1,000 in your account. While this can lead to significant profits, it also increases the risk of substantial losses.


Unrealized Profit and Loss (P/L)

Definition:Unrealized P/L represents the current profit or loss on your open positions. It fluctuates with market movements until you close the trades.


Importance of Monitoring Unrealized P/L

Tracking your unrealized P/L helps you gauge the performance of your trades and make informed decisions about when to take profits or cut losses.


Balance

Definition:Balance is the total amount of cash in your trading account. It remains unchanged while you have open positions. Once you close a trade, any profit or loss will be added or deducted from your balance.


How Balance Affects Your Trading

Your balance is crucial for determining your available margin and overall trading capacity. Keeping an eye on your balance can help you avoid margin calls.


Margin Requirement (Per Position)

Definition:The Margin Requirement is the amount of margin needed to open a specific position, expressed as a percentage of the full position size or Notional Value.


How to Calculate Margin Requirement

To calculate the margin requirement for a trade, multiply the Notional Value by the margin percentage. For instance, if you want to open a $10,000 position with a 2% margin requirement, you would need to set aside $200.


Required Margin (Per Position)

Definition:Required Margin is the amount of money that is reserved and locked up when you open a trade. This amount cannot be used for other trades until the position is closed.


Example of Required Margin

If you open a $10,000 position with a Required Margin of 2%, $200 will be locked up for the duration of the trade. Once you close the trade, this margin is released back into your account.


Used Margin

Definition:Used Margin is the total amount of margin currently in use to maintain your open positions. It represents the minimum amount of equity that must be maintained in your margin account.


How to Calculate Used Margin

Used Margin is simply the sum of the Required Margin for all your open positions. Understanding Used Margin is essential for managing your account's health.


Equity

Definition:Equity is the real-time value of your trading account, calculated as your balance plus the floating profit or loss from all open positions.


Importance of Equity

Equity provides a clear picture of your account's financial status. It helps you determine your available margin and assess whether you're at risk of a margin call.


Free Margin

Definition:Free Margin is the amount of money in your account that is not locked up due to open positions. This amount can be used to open new trades.


What Happens When Free Margin Reaches Zero?

If your Free Margin falls to zero or below, a Margin Warning is triggered, preventing you from opening additional positions. This makes it crucial to monitor your free margin regularly.


Margin Level

Definition:Margin Level is the ratio of Equity to Used Margin, expressed as a percentage. It helps you understand the health of your trading account.


How to Calculate Margin Level

To calculate your Margin Level, divide your Equity by your Used Margin and multiply by 100. For instance, if your Equity is $5,000 and Used Margin is $1,000, your Margin Level would be 500%.


Margin Call Level

Definition:The Margin Call Level is the specific percentage at which you will not be able to open new positions. If your margin level falls to this point, it serves as a warning that your account is under stress.


Understanding Margin Call Alerts

A Margin Call does not mean your trades will be closed, but it indicates that you should take action to improve your margin situation. You can either deposit more funds or close some positions to reduce your risk.


Stop Out Level

Definition:The Stop Out Level is the threshold at which your broker will begin closing your positions automatically to prevent your account from going negative. This occurs when your Margin Level falls below a specified percentage.


Example of a Stop Out Level

For instance, if your broker has a Stop Out Level set at 50%, any time your Margin Level drops below this point, your broker will start liquidating positions, beginning with the one showing the largest loss.


Margin Call

Definition:A Margin Call occurs when your account breaches the Margin Call Level but remains above the Stop Out Level. It serves as a warning that your open positions are at risk.


What to Do During a Margin Call

During a Margin Call, you can still hold your positions but cannot open new ones. It’s crucial to assess your account and decide whether to add funds or close trades.


Stop Out

Definition:A Stop Out occurs when your Margin Level falls below the Stop Out Level, resulting in the automatic closure of your open positions to prevent a negative balance.


How to Avoid a Stop Out

To avoid a Stop Out, maintain a healthy Margin Level by monitoring your equity and managing your trades effectively. Regularly assess your positions and be prepared to act if necessary.


Understanding these terms is essential for anyone looking to succeed in margin trading. By familiarizing yourself with this jargon, you can navigate your trading platform more effectively and make informed decisions.

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