3.2.2 Common terms in Mt4
In the MT4 trading terminal, you will come across terms like “balance,” “equity,” and “margin,” which play a crucial role in understanding the dynamics of your forex trading account.
Balance: This refers to the total amount in your forex account after closing all positions.
Equity: Equity represents the total funds in your forex account, including any unrealized gains or losses from open positions. It’s essentially the net asset value of your account.
Free Margin: Free margin is the remaining amount in your account after deducting the used margin. It’s the funds available for opening new positions.
Used Margin: Used margin refers to the total margin required for all open forex positions in your account.
Margin Level: Margin level is the ratio of your account’s equity to the total margin used for open positions, expressed as a percentage.
A quick tip for non-professional traders: You can skip the calculations and remember this – when the margin level approaches 100%, it’s essential to proactively manage your account’s funds to mitigate trading risks.
The formulas for these calculations are as follows:
Equity = Balance + Floating Profit/Loss
Balance = Equity – Floating Profit/Loss
Used Margin = (Contract Size ÷ Leverage)
Free Margin = Equity – Used Margin
Margin Level = (Equity ÷ Used Margin) × 100%
Now, let’s focus on understanding the “Margin Level” (also known as the “Margin Call Level” or “Stop Out Level”):
The “Margin Level” displayed in the MT4 trading terminal represents the current margin ratio in your account, which is the ratio of your account’s equity to the total margin used for open positions. This ratio reflects the safety of your trading account.
When the margin ratio falls below the broker’s specified margin call level, the broker may automatically close out your trades to prevent your account from going into further losses. For example, if the broker sets the minimum margin call level at 100%, and your margin level drops below this percentage, it means that there is not enough available margin in your account to cover the margin requirements of your open positions. In such a scenario, your trades may be forcibly closed to safeguard your account from additional losses.
Therefore, it’s crucial to maintain an adequate amount of free margin and ensure that your margin level remains above the specified margin call level to manage your trading risks effectively.
Distinguishing between Forex Margin Ratio and Margin Call Level:
Margin Ratio: It represents the percentage of the required margin amount compared to the total position value when initiating a forex trade. For example, if a broker requires a 2% margin ratio, you would need to deposit $2,000 as margin to trade a $100,000 position.
Margin Call Level: This is the point at which your account’s equity falls to a specific percentage of your used margin, triggering a margin call from your broker. The margin call level is often determined based on the margin ratio of your account.
For instance, if you have $1,000 in your forex account, intend to trade a $10,000 (0.1 lot) currency pair, and your margin ratio is 1% (equivalent to 100x leverage), you would need to deposit $100 as margin to open this position. If your broker sets a 50% margin call level, your account equity dropping to 50% of the margin used, or $50 in this case, would trigger a margin call. Consequently, your position might be forcibly closed to protect your account from further losses. Hence, it’s vital to continually monitor your account’s margin levels to ensure they remain above the margin call level.