Margin terminology can seem complicated because several account figures change at the same time. The key is to separate money in the account from the amount reserved to support open positions. Margin is not normally a fee or a direct trading loss. It is a portion of account equity set aside while a leveraged position remains open.
Leverage allows a trader to control a position whose notional value is larger than the account balance. This increases exposure to both gains and losses. A small market movement can therefore produce a significant change in equity, free margin and margin level.
The core account figures
Balance
Balance is the account value after closed trades, deposits, withdrawals and any posted charges have been recorded. Floating profit or loss from open positions is not included in balance.
Equity
Equity is the real-time value of the account after including open trading results. Its basic formula is:
Equity = balance + floating profit or loss
If open positions are losing, equity falls below balance. If they are profitable, equity rises above balance. Equity keeps changing as market prices move.
Used margin
Used margin is the total amount reserved for all open positions. The amount required for a position depends on factors such as its notional size, the applicable leverage ratio and any currency conversion required by the account.
A simplified calculation is:
Required margin = position value divided by leverage ratio
For example, a hypothetical position worth $10,000 with a leverage ratio of 50:1 would require $200 of margin. Actual calculations can differ by instrument and account rules.
Free margin
Free margin is the portion of equity that is not reserved as used margin. It may be available to absorb additional losses or support new positions.
Free margin = equity minus used margin
Free margin changes when positions gain or lose value, when trades are opened or closed, and when trading costs are posted.
How margin level works
Margin level compares equity with used margin and expresses the relationship as a percentage:
Margin level = equity divided by used margin, multiplied by 100
A higher percentage generally means there is a larger equity cushion relative to the margin committed. A falling percentage means that cushion is shrinking. When no positions are open, used margin is zero, so a meaningful percentage cannot be calculated. A trading interface may display a blank value or another indicator instead.
Trading providers set their own margin call and automatic position-closing rules. Traders should check the applicable terms rather than assuming that one percentage applies everywhere. Waiting for an automatic close is not a risk plan because fast markets, gaps and slippage can cause losses to develop quickly.
Worked hypothetical example
Imagine a $1,000 account with no open positions. Its balance and equity are both $1,000. Used margin is zero, while free margin is $1,000.
- A position is opened: Suppose the hypothetical trade requires $200 of margin. Balance remains $1,000, equity remains $1,000, used margin becomes $200 and free margin becomes $800. Margin level is $1,000 divided by $200, multiplied by 100, which equals 500%.
- The position develops a $100 floating loss: Balance remains $1,000 because the trade is still open. Equity falls to $900. Used margin remains $200, assuming the requirement has not changed. Free margin is $900 minus $200, which equals $700. Margin level is $900 divided by $200, multiplied by 100, which equals 450%.
- A second position is opened: Suppose it requires another $300 of margin. Total used margin becomes $500. With equity still at $900, free margin falls to $400. Margin level becomes $900 divided by $500, multiplied by 100, which equals 180%.
- Combined floating losses increase by $200: Equity falls from $900 to $700. Used margin remains $500, free margin falls to $200 and margin level becomes 140%.
The example shows two separate pressures. Opening another position increases used margin, while trading losses reduce equity. Both actions lower free margin and margin level. If a losing position is closed, the loss moves into the balance. The reserved margin for that position is released, but the loss itself is not recovered.
Common margin mistakes
- Treating margin as the maximum possible loss: Losses depend on position size, price movement, costs and execution. They are not limited to the initial margin allocation.
- Watching balance instead of equity: Balance can appear unchanged while open losses reduce the account's real-time value.
- Using all available free margin: Little remaining capacity means even a modest adverse move may create serious pressure.
- Opening correlated positions: Several trades may respond to the same market factor, causing losses to accumulate together.
- Ignoring changing requirements: Margin requirements may vary by instrument, position size or trading conditions.
- Relying on automatic liquidation: Forced closure is an emergency control, not a substitute for position sizing and planned exits.
A practical margin check
Before placing a trade, record the expected used margin, remaining free margin and resulting margin level. Then estimate how a planned stop loss would affect equity and recalculate the percentage. Include all open positions in the check. If the account would have little capacity after a normal adverse move, reduce the position size or avoid adding the trade. Margin makes larger exposure possible, but it also makes disciplined risk limits essential.
Educational content only, not investment advice. Leveraged trading can lose more than you expect.