Essential Forex Terminology
In this lesson, we’ll have a look at some more key terminology.
1. BALANCE
The balance represents the total funds in your account, disregarding any unrealised profits or
losses. For example, if you have $5,000 in your account and $200 unrealised losses from open
trades, your balance remains $5,000.
2. EQUITY
Equity indicates the amount of funds you would have if all open positions were closed at the
same time. Equity equals the balance plus or minus any profit or loss from trades (Equity =
Balance + P/L).
In the previous example, while your balance remains $5,000, your equity is $4,800 due to
unrealised losses.
3. FREE MARGIN
Free margin is the difference between equity and used margin. Free margin = Equity –
Margin.
It refers to the equity in a trader’s account that is not tied up in margin for current open
positions.
Example: Let’s consider opening a 1 lot trade on EUR/USD at the exchange rate of 1.0500.
Suppose you have $10,000 available in your trading account. Using 1:100 leverage, your
margin is $1,050. So, your free margin would be $10,000 – $1,050 = $8,950.
4. MARGIN LEVEL
The margin level represents the ratio of equity to margin expressed as a percentage. It’s
calculated by dividing equity by margin and multiplying by 100.
Margin level = (Equity/Margin)*100.
In the previous example, the margin level is (10,000/1,050)*100 = 952.4%.
As your open positions generate profits, your equity increases, leading to an increase in your
margin level. When you commit more funds to trades and incur losses, your equity decreases
resulting in a decrease in the margin level.
As you allocate more funds to trades and encounter losses, your equity decreases, causing
the margin level to fall.
5. STOP OUT LEVELA
stop out level is reached when your margin level falls to a specific level where your broker
automatically closes one or all of your open positions. This happens because the trading
account can no longer support the open positions due to a lack of margin.
6. MARGIN CALL LEVEL
Margin call level is when your broker notifies you that your account is approaching the stop
out level. Sometimes, margin call and stop out levels are equal.
This lesson wraps up Introduction to Forex.