Margin Level is a function to limit your losses from getting deeper, and this is very important in your risk management control role.
Margin Level can also function as your 2nd STOP LOSS.
The Margin Level formula can be calculated from “Equity” divided by “Used Margin” then multiplied by 100% (Equity / Margin x 100%)
A good margin level provided by a brokerage company must be a Margin Level of 100%, because there are some brokers that provide margin levels below 100% or even 0%, with the aim that if you lose money you can immediately run out.
Then How does this Margin Level function?
if your trading position experiences floating loss and your equity drops until it touches the same number or below your Used Margin (the margin used) or touches the 100% margin level indication or below, there will be a Stop Out or Margin Call in which all open trading positions You can be forced to close by the system so that you don’t experience any deeper losses, and the remaining money from the Used Margin will be returned to you (so you still have money left over that you can use to trade again).
In addition, the purpose of this margin level is also to protect you whether intentionally or unintentionally (because it is still common) but you use the full lot, then if you lose money, your funds will not be sold out.
With this correct margin level feature, traders are also encouraged to be aware and to be able to trade in a healthy manner with a reasonable lot volume in accordance with their equity capital capacity, and even if the position is open, the lot volume volume can be protected by stopping out at the 100% margin level at broker system.
because a lot of traders (especially those who are beginners) whose capital is always used up and can never profit properly, this is often caused because he opened a position with an oversized lot volume that is not healthy and eventually continues to run out.
Example of the Role of Margin Level Protection at 100%
For example leverage 1: 400 with a capital of 1000 USD, and you are trading with a volume of 3 regular lots in EUR / USD currency (when the running price is at 1.2) then the margin used is around 900, and if you are hit by a stopout at a margin level of 100% then all your open positions will be closed automatically and the loss of funds is only around 100 USD, while the remaining approximately 900 USD is returned to you.
Now compare if there is no 100% margin level, then if you lose, your capital will run out and become 0 without remainder.
So with a 100% margin level it is also a safety or a substitute for the second stop loss for protection so that your capital does not run out, and also encouraged to always use the appropriate and healthy volume lot.
In addition, with this 100% margin level feature you can use it as a different trading strategy application by utilizing the role of full lot, but not too risky, because there is margin level protection in order to reduce losses. It is like risking $ 100 but can generate profits that are many times more than that. (see the application example above so you have an idea)
NOTE: The broker stopout system will be active to close all your open trading positions if the margin level indicator touches at 100% or less, and you need to know that if there are too many open positions in your trading account, the broker system needs time to close one. one by force, so that the results of the numbers will not be possible to fit at 100%, but can be less or more.
You can see the% Margin Level when your trading account has an open floating position
One key to success in trading is located in your money management control, and margin level is one of the tools to control it, but if the margin level is made below 100% or even 0% then it will not be useful, and cause your capital can be depleted without remaining.
Leverage is also related to margin level.
If your broker’s margin level is 100% then leverage can function properly as protection, but if your broker’s margin level is 0% then this leverage will not work. Because leverage is basically the leverage to determine how big the risk is if a margin call or stopout occurs. And the higher the leverage, the risk of losing capital can also be even greater. Ideally leverage is in the range of 1: 50 or 1: 200 so that your trading can be with a healthy lot volume. Or if you want a little high risk, you can leverage 1: 400.
Only large and regulated brokers provide a 100% margin level. small brokers don’t provide that.
But don’t worry if you use a small broker for your trading, we hoteaforex provides a capable tool for your risk management.
Hopefully from our explanation above it can help you understand the true meaning of Margin Level and Leverage, because it is related to Risk Management that determines the success or failure of your trading.