The ability to trade on margin is the most appealing aspect of FX trading.
However, for many forex traders, the term “margin” is alien and frequently misunderstood. Margin trading allows you to enter positions that are larger than your account balance.
You can open a much larger trade in the forex market with a small amount of money. Then, with just a slight movement in price moving in your favor, you have the potential for phenomenally big returns. However, because most rookie traders have no idea what they’re doing, this is not frequently the case. Price will most likely move, but it will move against them.
Many new traders are unfamiliar with the concept of margin, how it is used, how to calculate it, and the importance it plays in their trading. Do you understand what a margin is? What about the used margin?
What is free margin? What exactly is a margin level? What is a margin call? What is a stop-out margin closeout?
As you can see, forex trading employs A LOT of “margin lingo.”
Before you choose a forex broker and start trading on margin, you should grasp what all of this margin lingo entails. Things bad will happen to your trading accounts such as a margin call or a stop-out. But you’ll have no idea what just happened or why it happened. If you truly want to grasp how margin is employed in forex trading, you must first understand how your margin trading account operates.
This begins with understanding what some (very essential) figures on your trading platform actually imply. We’ll refer to these figures as your margin account’s “metrics.” Take, for example, the MetaTrader 4, commonly known as MT4, trading platform:
The metrics above are all intertwined.
A change in one causes a change in another.
As a trader, you must be aware of their interrelationships…
BEFORE ever making a single trade on a live account. BAD THINGS WILL HAPPEN IF CERTAIN METRICS FALL BELOW A CERTAIN VALUE!
So you must be aware of these metrics! You must also understand what these “negative things” are! Make certain you understand how your trading account operates and how it uses margin.
So let’s get started.
The following metrics are displayed in a margin trading account:
A metric is just a measure of “something.”
This means that each of the metrics listed above measures something significant about your account’s margin.
The “Balance,” for example, measures how much money you have in your account. Furthermore, if you do not have a particular quantity of cash, you may not have enough “margin” to open new transactions or keep existing trades open.
Each metric may have somewhat different names depending on the trading platform, but what is being measured is the same.
Let’s go over the metrics on MetaTrader 4 once again.
Balance
Used Margin
Free Margin
Unrealized P/L
Equity
Margin Level
You’ll see that “Used Margin” does not appear to be displayed. But it exists. MetaTrader 4 only shows it as “Margin.”
Another example of account metrics from a different FX trading platform is as follows:
Don’t worry about the labels for now; we’ll explain each margin-related metric so that you’ll know which one is which regardless of the exact label.
We’ll also tell you what other names a specific metric is known by. And, at the end of this Margin Trading discussion , we’ll provide you with a handy “cheat sheet” for all of this margin jargon. Let’s go over each metric individually now.
We’ll begin with a simple one
Next Lesson: What is Account Balance?
