Balance:
When you have no open position, balance is the amount of the money you have in your account. For example, when you have a $5000 account and you have no open position, your account balance is $5000.
Equity:
Equity is your account balance plus the floating profit/loss of your open positions:
Equity = Balance + Floating Profit/Loss
When you have no open position, and so no floating profit/loss, then your account equity and balance are the same.
And for example when you have some open positions and they are $1,500 in profit in total, then your account equity is your account balance plus $1,500. If your positions were $1,500 in loss, then your account equity would be your account balance minus $1,500.
Free Margin:
Free margin is the difference of your account equity and the open positions’ margin:
Free Margin = Equity - Margin
When you have no position, no money from your account is used as the margin. Therefore all the money you have in your account is free. As long as you have no position, your account equity and free margin are the same as your account balance.
Lets say you have a $10,000 account and you have some open positions with the total margin of $900 and your positions are $400 in profit. Therefore:
Equity = $10,000 + $400 = $10,400
Free Margin = $10,400 - $900 = $9,500
Margin Level:
Margin level is the ratio of equity to margin:
Margin Level = (Equity / Margin) x 100
Margin level is very important. Brokers use it to determine whether the traders can take any new positions or not. Different brokers have different limits for the margin level, but this limit is usually 100% with most of the brokers. This limit is called Margin Call Level. 100% margin call level means if your account margin level reaches 100%, you can still close your open positions, but you cannot take any new position. Indeed, 100% margin call level happens when your account equity equals the margin. It happens when you have losing position/positions and the market keeps on going against you and when your account equity equals the margin, you will not be able to take any position. Forexoma margin call level is 100%.
Lets say you have a $10,000 account and you have a losing position with $1000 margin. If your position goes against you and it goes to a loss of -$9000, then the equity will be $1000 ($10,000 - $9,000), which equals the margin. Therefore the margin level will be 100%. If the margin level reaches 100%, you will not be able to take any new position, unless the market turns around and your equity becomes greater than the margin.
But what if the market keeps on going against you?
If the market keeps on going against you, the broker will have to close your losing positions. Different brokers have different limits for this too. This limit is called Stop Out Level. Forexoma stop out level is 5%. If your margin level reaches 5%, our system starts closing your losing positions automatically. It starts from the biggest losing position. Usually, closing one losing position will take the margin level higher than 5%, because it will release the margin of that position and so the total margin will go lower and the equity will go higher and therefore the margin level will go higher. The system takes the margin level higher than 5% by closing the biggest losing position first. However, if your other losing positions keep on losing and the margin level reaches 5% again, the system will close another losing position.
Why the broker closes your positions when the margin level reaches the Stop Out Level?
The reason is that the broker can not allow you to lose more than the money you have deposited in your account. The market can keep on going against you forever and the broker can not pay for this continuous loss. It makes sense, doesn’t it?
How to check your account balance, equity, margin and margin level?
You can see this information by checking the MT4 terminal. Open the MT4 and press Ctrl+T. The terminal will be opened and it shows your account balance, equity, margin, free margin and margin level.
This is how the terminal looks when you have no open position:
Balance - Floating Profit/Loss = Equity
$10,000 - $50 = $10,050
Margin = $2,859.52
(200,000 x 1.4300) / 100 = $2,860.00
Equity - Margin = Free Margin
$10,050 - $2,859.52 = $7,190.48
(Equity / Margin) x 100 = Margin Level
($10,050 / $2,859.52) x 100 = 351.46%
Summary:
Balance: Is the total amount of the money you have in your account before taking any position. When you have an open position and its profit/loss goes up and down as the market moves, your account balance is still the same as it was before taking the position. If you close the position, the profit/loss of the position will be added/subtracted to your account balance and the new account balance will be displayed.
Equity: Equity is your account balance plus the floating profit/loss of your open positions. For example when you have an open position which is $500 in profit while your account balance is $5000, then your account equity is $5,500. If you close this position, the $500 profit will be added to your account balance and so your account balance will become $5,500. If it was a losing position with -$500 loss, then while it was opened, your account equity would be $4,500 and if you closed it, $500 would be deducted from your account balance and so your account balance would be $4,500. When you have no open position, your account equity will be the same as your account balance.
Free Margin: Free margin is the money that is not engaged in any trade and you can use it to take more positions. You remember what the margin was, right? Free margin is the difference of the equity and margin. At the above example, your position margin is $10. Lets say the equity is $1000. Therefore, your free margin will be $990 ($1000 - $10). If your open positions make money, the more they go to profit, the greater equity you will have, and so you will have more free margin.
Margin Level: Margin level is the ratio (%) of equity to margin. For example when the equity is $1000 and the margin is also $1000, margin level will be $1000 / $1000 = 1 or in fact 100%. if the equity was $2000, then the margin level would be 200%.
Margin Call Level: Is the level that if your margin level goes below it, you will not be able to take any new position. Margin call level is determined by the broker. When it is set to 100%, you will not be able to take any new position if your margin level reaches 100%. When you have losing positions, your margin level goes down and becomes close to the margin call level. When you have winning positions, your margin level goes up.
Stop Out Level: Is the level that if your margin level goes below it, the system starts closing your losing positions. It will close the biggest losing position first. If this helps that the margin level goes above the stop out level, no more position will be closed. Then if your other losing positions keep on losing and the margin level goes below the stop out level again, the system closes another losing position which is the biggest one.
