Margin level in line with margin calls
Before everything else, let us first define what margin level is. The margin level enables the trader to know if it is still possible to open a new trade. It is always expressed in percentage, and it depends on the equity and the used margin. The higher the margin level, the higher the free margin. The lower the margin level, the lower the free margin.
So, what is a margin call?
When the margin level hits a specific level, then a margin call enters the picture. Upon hitting this level, some or, unfortunately, all of your positions have the potential to be closed or liquidated.
We defined margin level because it is the metric while the margin call level is its value. Most of the time, forex brokers set a limit of 100%. It differs from one forex broker to another. Your margin level must not be equal to or lower than 100%. It should always be more to make another trade and avoid a margin call.
Tell me more about margin calls!
Your broker will surely let you know through email or text message when your margin level is lower than your margin call level. Your forex broker will notify you when your used margin is more than your account equity. Your equity lowers when you accumulate massive unrealized losses. The margin call level is less than the minimum level requirement.
Are you still confused between margin call and margin call level?
Think of margin call level as a limit that your forex broker set. This margin call level will activate a margin call. Usually, this is 100%.
Let us cite an example of a 100% margin call level
Most forex brokers set their margin call level at 100%. Your forex broker or your trading platform will either send you an email or a text message if you hit a 100% margin call level. Upon receiving the margin call, because your margin level is lower than 100%.
For example, you own a $1,000 account, and you opened a EUR/USD 1 mini lot position with a $300 required margin. The used margin is also $300 because you have only one existing trade at the moment. The price turns in to opposite direction, and you found yourself on the losing side. You now have an unrealized loss of $900.
Your equity is now:
Equity = balance + floating P/L
$100 = $1,000 – $900
Your margin level is:
Margin level = (equity/ used margin) 100%
33% = ($100/ $300)100%
So, what happens now?
Since your margin level is lower than 100%, you can’t make new trades unless the price goes towards your favored direction or your equity becomes more than your used margin.
Here is what you can do: put more money in your account if you can’t or won’t close your current trades.
But if worse comes to worst — your margin level declines more! Your forex broker will close your position. We call this occurrence a stop-out level.