Margin Level in Forex Trading
One of the primary indicator or tools traders use nowadays is the margin level.
While a margin is the difference between a production cost to the selling price of a certain product or service, a margin level is the margin an investor holds in able to open available positions.
The most basic definition of the term is the percentage value based on the number of accessible usable margin compared to margin alone. In simpler terms, this is the correlation of the of equity to margin which is calculated in a certain way.
The calculation of the margin level usually requires dividing the equity with the used margin and multiplying it by a hundred. The calculated margin level then will be used to predict whether traders will be able to take new positions in the forex market. This equation usually helps the trader effectively figure out what percentage of their funds can be used to open new trades.
Trading with Margin Levels
In trading the forex markets, a trader or an investor must first understand margin and margin levels. Prior to getting familiar with forex trading, one must understand the concept of margin levels.
Using margin levels in forex trading can be best explained like this. Once an investor opens a margin account to trade in the forex market. They must be able to deposit an amount depending on the brokerage’s margin percentage which usually ranges from one or two percent. The rest of the deposit then would be provided for by their assigned broker. The rest of the conditions then can be set or customized by the broker and their client. In most terms, the deposited amount from the investor will then be placed as security in cases of potential losses.
In forex, margins are a part of forex trading which is necessary to ensure a highly profitable forex trading transaction along with a wide background in margin level and calls. These can also help create a stable trading strategy that can help avert losses and produce profits.
As an investor borrows a specific amount of money from a broker to open trades and investments, losses or the price of securities may come to a point where it slumps below the required percentage or maintenance margin. This is where a margin call comes in. A margin call will be received by the investor from their broker if a specific number of their assets or securities, which was bought by the investor using the borrowed margin, loses some value or decreases to a certain point. The percentage to which the value is considered decreased is usually set at around 25%. However, this always depends on the brokerage or the amount which was used to buy the said stocks or assets.
The margin call made by the broker will then require the investor to make another deposit in an amount that would be needed for the maintenance margin which is the minimum number needed in a margin account. It can also be called maintenance requirement since it is basically the amount needed to keep an account or an investment open.
In investing, margin buying means generally buying an asset or currency at a price percentage of the specific asset’s original value and gets the rest of the expenses or costs from the brokerage or a financial firm which are usually banks. Brokerages usually offer this option with a margin account.
Investors who venture into margin buying must know the pros and cons of trading with the method. While this allows you to expand someone else’s money along with increasing their personal funds as well. However, this also comes with a high level of risk as some asset prices or value tend to suddenly decline which require them to pay back their broker with a larger amount or making another deposit to keep an ongoing investment active.