If you are a trader who is learning or has experience of participating in the Forex trading market, then the term Margin Level is no longer strange. This is an important term to help you understand if your trading account is safe enough to open new orders. So what exactly is the margin level in MT4? Let’s find out in the article below.
What is margin level in MT4?
The margin level is a percentage (%) calculated based on the net worth and margin used with the following formula:
Margin level = (Equity/Margin used) x 100%
Forex brokers use margin to determine if a trader can open new trades:
- The higher the margin level, the more money is available to open new trades.
- The lower the margin, the lower the amount available to enter new trades.
Different brokers have different margin limits, but most will set this limit at 100% (this limit is called the margin call level).
The 100% margin call occurs when the equity is equal to the margin used. It usually happens when a trader has a losing trading position and the market repeatedly goes against the trader’s desired direction, causing an equity drop. At that time, the capital will be equal to the margin used, and the trader cannot open more trades.
It can be said that the level of margin is essential. It shows the current level of account risk, from which investors can take timely measures to prevent. Investors should regularly monitor the margin of their account as it indicates whether they have enough money to execute a new order or continue to hold an open position. If the margin level is lower, if prolonged, it will cause a Stop out or a Margin Call.
What is Margin Level?
Margin allows traders to open leveraged trading positions, allowing investors to trade more of their initial capital. Margin requirements vary depending on the forex broker and the region where you open your account.
For example, if a forex broker offers a margin of 3.3% or 1:30% leverage and a trader wants to open a position worth $100,000, they deposit $3,300 to enter the transaction. Brokers will provide the remaining 96.7%. As the trading volume increases, the amount of margin also requires increases.
However, remember that margin can be a double-edged sword because it helps to make huge profits while also creating significant losses.
When the order is running, we say that the order is at a loss, the capital drops, the margin level drops if the margin is reduced by the margin used, then the margin level = 100% if lower, then the margin level < 100%.
Margin level <= 100% indicates free margin <=0. At this point, you cannot open any more new orders. When the margin level decreases, it means that you are losing heavily, the account is in an unsafe state, you need to take timely measures to avoid a net loss (margin level = 0% when the capital = 0), or the account is damaged negative (margin level < 0% when the equity < 0 ) if the market continues to go against your order. And if after your order starts to improve, the fairness will increase, the margin level will increase, the account will return to a safe state.
A trading account is considered safe when the margin level is > 100%, when this ratio decreases, forcing you to intervene in your account or trading orders to improve it.
In order to avoid the case where investors do not regularly monitor running transactions or are negligent in not paying attention to the margin level ratio, forex brokers have set a specific limit if the margin level falls below the limit. During this time, the exchange will notify traders through an order/warning called Margin Call so that they can intervene promptly, avoiding the situation of letting the account suffer heavy losses if the market continues to fluctuate in the opposite direction. Typically, forex brokers often choose a 100% limit. When the margin level falls below 100%, a margin call occurs.