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January 18, 2018

Question:What are Balance, Equity, Margin, Free Margin, Margin Call, Leverage and Stop Out?

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Answer:

What is Balance, Equity, Margin, Free Margin and Margin Call?

Balance, Equity, Margin, Free Margin, Margin Call, Leverage and Stop Out are the basic of Forex trading.

First, let’s find out the meanings of Balance, Equity, Margin, Free Margin and Margin Call below.

Balance
Balance is the amount of money on your account after the last closed trade.
Equity
Equity is the sum of Balance and current Profit/Loss of open positions and SWAP.
Margin
Margin is the amount of money necessary to cover your possible losses during margin trading.
Free Margin
Free margin is the amount availabe to open next trades. Free margin equals equity minus margin.
Margin Call
Margin Call is an alert to the trader when the account equity falls below 50% Margin Level. This means, that the account is left with only the supplied margin and should be funded with more money in order to prevent it from facing a Stop Out or a forced closure. Trading platform will start closing trading positions at Stop Out level, which is set to be 20% of Margin Level.

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What is Leverage?

Leverage is a mechanism that allows you to trade with margin less than the transaction amount.

FX leverage refers to a mechanism that allows you to trade more than the amount of money (margin or deposit) put in your account.

The reason why it is possible to apply leverage is that FX trading is a “difference settlement” transaction in which you do not transfer the bought and sold currencies but receive only the profit and loss generated by the market price up and down.

This allows you to trade without depositing the full amount of the transaction.

You can only receive profit (or loss) caused by exchange rate movements.

Even in the case of transactions in which the foreign exchange rate affects profit and loss as in FX, for example, foreign currency deposits cannot be leveraged because they actually deliver and receive currency.

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Risk of High Leverage

The direct risk of being highly leveraged is that if the market goes against your expectations, you are likely to fall short of margin quickly.

If the margin required is deducted from the amount of the account funds including the unrealized loss, there is an increased risk that additional margin will be required or a stop out will occur.

It is necessary to put more money than required margin money in the account fund so that it can cope with some market fluctuations.

If you are a beginner, it is necessary for risk management to know how many times the currency amount/rate you are trying to trade is against the account funds and not to hold too many positions.

Go to XM Official Website and you can use the online calculator to find out the numbers in instantly.

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Leverage and Stop Out Level

Margin maintenance rate is the ratio of the margin balance (effective margin) that takes into account unrealized gains and losses into the required margin.

Margin maintenance rate and leverage can be calculated using the following formulas.

Margin maintenance rate = Effective margin / Required margin x 100

(Effective Margin = Total Assets + Valuation Gain/Loss-Withdrawal Request Amount)

When the stop out is activated, all the held positions will be settled, so the unrealized loss held will be fixed as a loss.

XM supports NBP (Negative Balance Protection), which ensures that traders do not lost more than the total account balance.

To prevent stop out, it is necessary to keep leverage low and margin retention high.

Therefore, please make sure that you have a large amount of money in your account and that you will not fall below the required margin even if there are some fluctuations in market prices.

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