How Margin Work?

Beginner Questions
1

I was wondering if someone can give me a complete run down on how the “margin” works when trading in forex. I know it allows you to trade with more money as if it’s an interest free loan on your actual balance. Each company offers different margins for traders 1:50 1:100 1:500 and then I noticed the reverse 2:1 50:1, etc. and so on. How is that calculated? What’s the difference between 1:50 and 50:1 ratio when it comes to Margin trading. Is it 1:50 means 1,000 will let you trade with 50,000 and 50:1 means 50,000 will let you trade with 1,000 or is it 1:50 = 1,000 gives you 1,000+50,000 to trade with and 50:1 means 50,000 will let you trade with 50,000+1,000?

I am using a demo account and I was just messing with the trades and ended up trading a lot of lots to almost where I did not have enough margin left. (This was for the sole purpose of figuring out the leverage system). I had 100,000 as the starting balance for the demo and when my trade’s made my balance go down to around 70,000 it automatically closed my trade. I did not put in a stop loss. I read somewhere that the company puts an automatic stop loss for you. How does the system calculate what the stop loss is? I am assuming if I had 10,000 then my trades would have closed when my balance hit 7,000.

What does the Margin, Free Margin, and Margin level all mean? How is it calculated. And if you can give me links to posts or articles/info for more on this it would be much appreciated. Thanks.

2

You are confusing “margin” with “leverage”.

Leverage is what you use to trade much more than you have in your account.

“Margin” is the amount you have used to open a position.

Say you have a $1,000 account, and open one mini lot of USD/JPY at 100:1 leverage.

You are trading $10,000 units at 100:1, so you have used $100 of your account, so you now have $100 in “margin” $900 in “free margin”, and you “margin level” would be the percentage of your “margin” into your “equity”.

Your “equity” is the amount your account has as a cushion. It grows, or shrinks as your trade moves, and so will your “margin level” accordingly.

It the scenario above, your initial “margin level” would be 900% as you have 9 times the equity of your used margin of $100.00.

If your trade was still open, and you lost 100 pips, your margin would be the same, but your equity would have dropped by $100 to $800. Your margin level would be 800%.

If you had GAINED 100 pips, your equity would be $1000, your margin would still be $100, for a margin level of 1000%.

If you close the trade $100 pips positive, your balance would now be $1,100.00, your equity would be $1,000.00 and your free margin would be $1,100.00

Margin, and margin level only show up when you have an open trade.

3

Thanks Master. Was having trouble understanding it too but that about summed it up. Thanks!