In this lesson, we’ll have a look at other key definitions.
1. BALANCE: This represents the amount of money you have in your trading account. Unrealised profit or losses are ignored. For example, if you have USD 5000 in your account and USD 200 unrealised losses from open trades, your balance remains USD 5000.
2. EQUITY: Equity is the amount of money that you will have in your account if you were to simultaneously close all your open positions. Equity = Balance +P/L.
Using the previous example, if your balance is USD 5000 and your unrealised losses are USD 200, your equity would be USD 4800.
3. FREE MARGIN: Free margin represents the difference between your equity and the open positions’ margin.
Free margin = Equity – Margin.
For example, let’s say that you want to open 1 lot of EUR/USD at 1.0500 with USD 10,000 in your account. Using 1:100 leverage, your required margin is USD 1050.
So your free margin is:
USD 10,000 – USD 1050 = USD 8950.
4. MARGIN LEVEL: Margin level is expressed as the percentage ratio of equity to margin.
Margin level = (Equity/Margin)*100.
In the previous example, margin level is (10000/1050)*100 = 952.4%.
Margin level reflects how much margin you have relative to your open positions.
As profits or losses affect your equity, your margin level fluctuates accordingly. An increase in equity raises the margin level, while losses lower it.
5. STOP OUT LEVEL: This is the limit at which your margin level can decline. Once it reaches this level, you can still close existing positions, but you are not allowed to open new ones. If the margin level falls below the stop out level, your trades will close automatically beginning with the ones losing the most, in order to free up equity.
6. MARGIN CALL LEVEL: Margin call level represents the level at which your broker warns you that your account is approaching the stop out level. In some cases, the Margin call and Stop-out levels are equal.
