MARGIN & LEVERAGE
Margin Trading: Definition, Equity, Free Margin, Margin Level, Margin Call & Risk
A clear guide to margin: what it is, how it’s calculated, how it relates to leverage, equity and free margin, what “margin level” means, how margin calls/stop-out work, plus practical examples and risk controls.
Margin
Leverage
Department
OTM Academy
Category
Fundamental Analysis
Margin: What It Means
Margin is the good-faith deposit you lodge with your broker to open/maintain positions. It’s a fraction of your trade’s notional value and is expressed as a percentage. Required margin also implies the maximum leverage available (e.g., 5% margin ↔ 1:20 leverage). Using leverage magnifies both profits and losses—manage it carefully.
Leverage & Required Margin
If leverage is 1:20, required margin is 5%.
If required margin is 10%, max leverage is 1:10.
Example: Notional trade value $20,000 with 1:20 → required margin $1,000.
Equity, Used Margin & Free Margin
Balance: cash in the account (closed P/L only).
Equity: Balance ± Open P/L.
Used Margin: total margin tied to open positions.
Free Margin: Equity – Used Margin (what’s available to open new trades).
Example (balance $1,000, margin 5%, position $8,000):
Used Margin = $400; Equity initially $1,000; Free Margin $600.
If open P/L = +$50 → Equity $1,050, Free Margin $650. If –$50 → Equity $950, Free Margin $550.
Margin Level, Margin Call & Stop-Out
Margin Level shows account health:
Margin Level % = (Equity / Used Margin) × 100.
0%: no open trades.
100%: Equity equals Used Margin → typically cannot open new trades.
Margin Call: broker alert when Margin Level falls to a warning threshold (varies by broker, e.g., 50% or 80%).
Stop-Out: at a lower threshold (e.g., 30%), broker starts auto-closing positions—largest exposure first—to restore Margin Level.
When Does a Margin Call Happen?
A call occurs when Free Margin ≤ 0 (i.e., Equity ≤ Used Margin) or when the broker’s Margin Level threshold is breached.
Rule of thumb:
Balance – Open Loss < Required Margin ⇒ Margin Call risk.
Best Practices & Regulations
Position sizing: risk ~2.5–5% of capital per idea.
Always set Stop-Loss; don’t average into losers.
Limit concurrent positions to avoid tying up margin.
Choose appropriate leverage (higher isn’t better).
Monitor around news—volatility can compress equity quickly.
Know your region’s limits: e.g., retail caps like 1:30 FX (margin 3.33%) vs professionals up to 1:500 (margin 0.2%) in some jurisdictions.
Practice on a demo to learn how equity/free margin behave in real time.
