Other key Definitions

In our last video, we discussed the meaning of the bid price, the ask price, the spread and what is a SWAP. In the current video, we’ll have a look at other key definitions.

BALANCE is the amount of money you have in your 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 is still considered as USD 5000.

EQUITY on the other hand is the amount of money that you will have in your account, if you simultaneously close all your open positions. Equity = Balance +P/L.  

In the previous example, your balance is USD 5000, but your equity is USD 4800.

FREE MARGIN
It is the difference of 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 and you have USD 10000 in your account. Using 1:100 leverage, your margin is USD 1050. So your free margin is 10000-1050 = USD 8950.

MARGIN LEVEL
It is the percentage ratio of equity to margin.
Margin level = (Equity/Margin)*100.
In the previous example, our margin level is (10000/1050)*100 = 952.4%.
If your open positions make money, your equity increases and so does your margin level. As you commit more money into trades and your equity declines due to losses, the margin level falls.

STOP OUT LEVEL
It is the limit at which your margin level can fall. At that level, you can still close positions, but you are not allowed to initiate new ones. If the margin level falls below the stop out level, your trades, start to close automatically beginning with the ones losing the most in order to free equity.

MARGIN CALL LEVEL
It is the level below which you get a warning from your broker that your account will soon reach the stop out level. Sometimes, the Margin call and Stop-out levels are equal.

With this video, we have concluded the introduction to Forex.