Margin trading is especially common in the forex market. Because of the high entry threshold, most brokers offer clients leverage, which allows them to trade forex with a relatively small initial investment. However, this approach involves additional costs, such as swaps, and significant risks, including potential losses if traders fail to manage risk properly.
In this article, we look at the main risks associated with margin trading. We also explain how borrowed funds work, how margin works in practice, and what traders should do to maintain a safe margin level and protect their account’s health.
The article covers the following subjects:
Major Takeaways
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A trader’s capital in forex trading is divided into several key categories: account balance, equity, margin, free margin, and margin level. Traders need to monitor all these indicators closely to avoid potential losses.
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The margin level in forex is expressed as a percentage and calculated using the following formula: Margin level = equity/margin x 100.
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A safe margin level is generally considered to be above 300%. The higher the current margin level, the better. This indicator is critical for assessing the account’s health and must be tracked continuously.
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General recommendations for maintaining a healthy margin level: risk per trade should not exceed 2% of account equity; the number of open positions should be limited to five; a stop loss must always be set; margin requirements should remain within the 500%–1000% range; traders should leverage carefully, ideally not exceeding 1:200.
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When the margin level drops below 100%, the broker issues a margin call. In this situation, the trader should promptly review all open trades, close the most losing positions, and add more funds to the trading account. If the margin level falls below 20%, the broker may automatically close positions via a stop-out mechanism, resulting in additional losses.
Margin Level in Forex Explained
Let’s talk about what the margin level is, where to find it on a trading platform, and how to calculate it.
Why Margin Level Matters in Forex Trading
In forex trading, as in any other market, it is essential to monitor the margin level. It directly affects how traders manage risk. If the margin level drops below a certain point, there is a real risk of losing all the money in the account. In simple terms, margin is a security deposit. It is a sum of money set aside in advance to confirm the ability to meet obligations when trading forex. This security deposit allows brokers to provide borrowed funds for margin trading.
How Margin Level Works: Step-by-Step Breakdown
To understand how margin works, it helps to briefly examine how funds are structured in a trading account. As an example, let’s use one of the most popular trading platforms, MetaTrader. Launch the platform and press Ctrl + T to open the Terminal window.
If there are open positions, you will see the following fields: Balance, Equity, Margin, Free margin, and Margin level.
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Account balance is the amount of money in the account, excluding profit or loss from open trades.
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Equity includes the account balance plus the current result of all existing positions. If prices move against the trader, equity drops, and vice versa.
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Margin is the amount of capital the broker reserves to support open positions. These funds cannot be used for new trades.
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Free margin indicates how much margin remains. When free margin increases, traders have more available funds to open new positions or increase position size.
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The margin level is the key indicator here. It is expressed as a percentage and reflects the relationship between equity and used margin.
The higher the account equity and the lower the used margin, the higher the margin level. When account equity declines and more funds are locked in used margin, the margin level falls.
Margin Level Calculation Formula
Margin Level = Equity/Margin x 100
Assume there is $10,000 on a trading account. A trader opens a position with a required margin of $1,000. Immediately after opening the trade, the margin level equals: 10,000 / 1,000 × 100 = 1,000%.
Now assume the forecast turns out to be correct and, after some time, the profit on the open position reaches $5,000. As a result, account equity increases to $15,000. The margin level rises to: (10,000 + 5,000) / 1,000 × 100 = 1,500%.
However, if the forecast is inaccurate, a floating loss appears. Loss-making positions reduce account equity. If potential losses reach $5,000, equity drops to $5,000. In this case, the margin level equals: (10,000 − 5,000) / 1,000 × 100 = 500%.
Understanding Margin Level Percentage
The equity-to-margin ratio is usually expressed as a percentage. This is a clear way to assess how well equity covers the required margin, regardless of the account currency or absolute amounts. This ratio immediately reflects risk level, makes it easy to compare margins across traders and forex brokers, and helps quickly assess how close the situation is to a margin call or automatic position closure.
The higher this ratio, the safer the deposit is in the current situation. The lower the margin level, the worse the account’s health. If further losses occur in forex trading, the margin level falls, increasing the likelihood of a margin call and forced closure of open trades.
That is why traders need to maintain a safe margin level and monitor the percentage at all times.
Optimal Margin Level: What Percentage to Maintain
An optimal margin level in forex represents a balance between flexibility and risk control. A level above 100% is considered stable, while 300% or higher is viewed as a healthy margin level. The most important rule is to avoid letting the margin level drop below 100%. Conservative traders usually keep the used margin below 15% of account equity, while more aggressive traders may allow 30–60%. Each trader’s risk tolerance is different.
Key margin levels to watch:
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Above 100%: a stable condition for trading forex.
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300% and higher: optimal, providing a buffer, especially during high volatility. The more free margin available, the easier it is to open new trades.
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Below 100%: a high risk of a margin call. Many brokers may restrict new positions and start closing existing positions to prevent potential losses.
Free Margin vs Used Margin: Key Differences
Since forex trading almost always involves leverage, the broker effectively lends the trader a certain amount based on the position size. For example, with leverage of 1:50, a trader can open a trade that is 50 times larger than their own funds. To illustrate, opening a position of 0.5 lots (50,000 units of the base currency) requires only 1,000 units of the trader’s own money on the account.
To guarantee the return of borrowed funds, the broker holds a security deposit of the appropriate size. These are known as margin requirements. This deposit is reserved on the trading account and is called used margin. The margin remains locked for as long as the position is open. After the position is closed, the funds are automatically released and become available again for new trades. In other words, used margin is the amount of money blocked by the broker on a trader’s margin account.
Free margin is the amount of funds available to open additional positions. Each new position must be backed by the appropriate required margin. The more open positions a trader has, the higher the used margin and the lower the free margin. A trader can continue opening trades until the used margin equals the equity, which corresponds to a margin level of 100%.
Free margin is calculated as: equity − margin.
Margin Level Risks: What Happens When It Drops
When the margin level falls, certain risks arise — primarily a margin call and a stop-out. Below, we explain what these situations mean and what consequences may follow.
Margin Level Below 100%: Margin Call Explained
The more aggressively a trader operates, the more margin they tend to use. In forex trading, situations may occur where a trader either opens too many positions or their trades become loss-making positions, for example, due to an incorrectly calculated stop loss. In such cases, the margin level may drop below 100%.
Then, the broker notifies the trader that losses are approaching a critical threshold. This notification is known as a margin call. At this point, the trader is advised to close some unprofitable positions to free up margin and restore a safe margin level. Alternatively, the trader may add additional funds if they wish to maintain their existing positions and aim for future profit.
Note: brokers set the margin call level at their discretion; in most cases, it is 100%.
Margin Level Continues Falling: Stop Out Risk
If a trader takes no action after receiving a margin call and the market continues to move against them, the margin level will keep falling. In this case, a stop-out may occur.
A stop-out is the broker’s automatic closure of the trader’s most unprofitable position in the trading account. It occurs when the margin level reaches a critically low value, for example, 20%, depending on the broker’s trading conditions.
If, even after closing the most unprofitable position, account equity falls further, the broker closes the next losing trade, and so on. When trading with higher leverage, all losing positions may be closed at the same time.
Margin Level Calculation: Practical Examples
Let’s look at several trading scenarios and see how much margin is required while calculating the margin level in practice.
Example 1: Safe Trading Scenario
A safe trading approach is to maintain a margin level above 300%, even if open positions move against the trader. This can be achieved by following several basic rules:
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Do not use excessive leverage. A reasonable range is from 1:50 to 1:200.
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Do not trade more than five instruments at the same time.
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Risk no more than 2% of the initial investment per trade.
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Always set a stop loss.
For example, if a trader has an account equity of $10,000 and uses leverage of 1:100, then opening a 0.5-lot position (50,000 units of the base currency) on USD/CAD requires a margin equal to $500. At the moment the position is opened, the margin level equals 2,000%. This is a secure value.
At some point, the trader may decide to open a position on EUR/USD with a volume of 0.5 lots. In this case, an additional $585.51 in margin is required. The margin level then drops to approximately 920%. This is still a safe margin level for online forex trading.
To calculate how much margin is needed before opening new positions, traders can use trading calculators available on the trading platform.
Example 2: Risky Trading Scenario
Let’s look at the main signs of high-risk trading:
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High leverage, above 1:200.
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Trading too many instruments at the same time.
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Risk per trade above 2%.
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Trading without stop losses.
With this type of forex trading, if the market moves against the trader and equity declines, the margin level decreases rapidly and may eventually fall below 300%. At this point, it is worth reviewing trading decisions.
To improve the situation, a trader can take the following steps:
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Add more money to the trading account as a security deposit.
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Close losing positions and adjust position size.
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Lock in profits on profitable positions, if available.
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Set tighter stop losses.
If the margin level drops below 100%, the broker will issue a margin call notification to the client.
Example 3: Margin Call in Action
A margin call is a broker notification that traders must add funds to prevent their positions from being closed by a stop-out. It is important to keep the margin level above 100% at all times. In simple terms, the account equity must exceed the required margin.
Suppose the client ignores the notification. In this case, when the margin level falls below 20%–40% (the exact threshold depends on the broker), the company will automatically close losing positions via a stop-out, and the trader may lose their initial investment. The broker is entitled to take this action. Otherwise, the trader’s account balance could fall below zero, and the trader would owe the broker money under the trading conditions.
What can be done after receiving a margin call?
Margin Level Best Practices: Quick Summary
Let’s review the best practices for managing the margin level.
Five Key Rules for Managing the Margin Level
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Try to keep the margin level above 300%. This helps protect against a margin call and reduces the risk of losing the deposit.
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Do not allow the margin level to fall below 100%. If this happens, close all or part of the losing positions, then review the trading plan.
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Risk no more than 2% of the deposit per trade. This approach helps maintain a consistently high margin level.
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Do not open positions in more than five instruments at the same time. Each position requires its own margin. When too many open positions are held simultaneously, there may not be enough free margin to support them.
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Use reasonable leverage. Higher leverage can lead to rapid equity losses. Even if many brokers offer 1:500 leverage, that does not mean it should be used.
Margin Levels: When to Act
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Margin level |
Status |
Action |
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Above 300% – 500% |
The deposit is relatively safe. |
Trade as usual. |
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200% – 300% |
A healthy margin level |
Consider adjusting existing positions: tighten stop losses, close a trade that has been open too long without results, or close it partially. |
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100% – 200% |
Free margin is running out, and the risk of a margin call increases |
Add funds to the account if the situation develops as planned. Close the most losing position at the market price. |
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Below 100% |
Margin call: High risk of forced position closure and capital loss |
Close all losing positions and reassess market conditions. Add more funds to the account to avoid forced closure of open trades. |
Checklist Before Opening a Trade
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The margin level after entering a trade should be at least 300%. If the margin level drops below 300% immediately after opening a position, the position size is too large. Why take on unnecessary risk?
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There should be enough buffer for unfavorable price shifts. The margin should withstand at least two to three average daily ranges (ADR) without excessive stress.
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The number of simultaneously open positions across different instruments should be fewer than five. Each additional trade, especially in correlated markets, increases the used margin and increases risk.
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The stop loss level must be clearly defined. Even if the market moves against expectations, the trader should know exactly where the position will be fully closed.
Key Takeaway
In margin trading, traders must constantly maintain an optimal balance between equity and margin. Experienced traders aim to keep the margin level above 300%, and preferably within the 500%–1,000% range. With proper stop losses, this approach is considered relatively safe. Avoid opening a large number of positions in a single instrument, and do not trade too many different instruments at the same time.
Conclusion
Margin trading offers significant opportunities for rapid gains but also carries risks. These risks stem from potential losses, especially when a trader uses higher leverage and fails to follow basic capital management rules.
For convenience, the current margin level is displayed as a percentage on the trading platform. Traders should make sure this indicator never falls below 100% and follow the recommendations outlined in this article.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
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