I have a few more things to say about margin and leverage as they relate to traders.
As a reminder, a margin is essentially a “down payment” on a trade—you can put up a certain percentage of a trade’s value and your FX dealer will allow you to control a larger position size.
But when you’ve used up your entire margin, your broker will close out your positions.
Let’s break down some of the most important numbers you’ll see on your trading screen…
Your account balance is the amount of money that you had in your account before you opened any trades.
Your equity is your account balance, plus the gains, minus the losses, that are open in your account right now.
If you have a lot of positive open trades, you have a higher equity than you do a balance. In other words, if you closed everything, your balance would go up.
If you have no open trades, your balance is the same as your equity.
If you have a bunch of open negative trades, your equity is lower than your balance. In other words, if you closed everything, you’d be losing money.
You don’t want to run out of equity, which means you don’t want to have a bunch of open losing trades.
Your margin is the amount of money that the dealer is taking out of your account and setting aside as a good-faith down payment on the trades you take.
Your free margin (or usable margin) is the amount of money that you have left over to put up against more trades.
It’s just like how a real estate investor might have $100,000 and use a $10,000 out as a down payment on one property. They have $90,000 left over for more down payments on more properties.
But your free margin isn’t just used to take new trades…
It’s also used to cover your losing trades. If you’re losing money, you have less usable margin, which means the value of your account is falling.
Imagine that same real estate investor puts $10,000 down on a property, has $90,000 in the bank, and then goes and blows $7,000–10,000 on drugs. Now they don’t have as much money as they had before in free, usable down payment money.
But if you have a bunch of winning trades in your account, your usable margin goes up, so you actually have more money to play with. So if the value of that guy’s real estate goes up by $50,000, he could borrow against that $50,000 and keep trading or keep buying real estate.
In other words, as you make good trading decisions and your account grows (either realized or unrealized), your usable margin goes up as well.
Your margin level basically shows you the health and strength of your trading account.
This is the most important number.
When your margin level hits a certain percent (generally around 30% but ask your FX dealer), your dealer gives you what is called a margin call, which means you’ve run out of usable margin. Then they close all your trades out.
You want to keep your margin percent as high as possible so there’s no risk of your trades being closed down. The easiest way to do that is trade small trade micro-lots, and make many trade sizes. You’ll never use very much margin. You’ll never need very much leverage. Your free margin will always stay high and you’ll never get a margin call.
Nine out of 10 traders blow up their trading account within 90 days. That’s because they have big trade sizes in small trading accounts.
If you have small trade sizes in every account, you will last past that 90-day mark, and the chances that you are going to succeed. I’m not going to make any promises… But the longer you can survive with small trade sizes, the better you can do, the more you can earn.
Need a refresher on margin and leverage? It’s a powerful drug, but there are some downsides if you’re not careful. Here’s how I use it to trade my way to powerful profits…