you may have heard the terms “trading on margin” and “leveraged trading”. They’re not exactly the same but they’re definitely 2 sides of the same coin. I’m sure any beginning trader can tell you how much margin he’s getting. Not a lot of them will be able to explain how a margin call happens. So here we go.

When you’re trading on margin, no money is deducted from your account until you close a position. It’s the broker who is opening that position using leverage of anything from 20 to 1 to 800 to 1, in extreme cases. That means that for every dollar or pound you put aside, the broker is opening a position on your behalf worth $20.

Now, notice what we said. You put aside. That’s the required margin to open that $20 position. That required margin will usually be stated in terms of percentage, as opposed to the ratio signature by which leverage is expressed. So if your leverage is 20:1, your broker requires a 5% margin down payment.

OK. Here’s where it starts getting interesting. The moment you open a position, your account balance will remain the same. But it WILL be split into used margin and free margin. That used margin is made up of required margin plus collateral; it’s meant to cover potential losses. Your SAFETY MARGIN. Think of that set of lines around a page they create so you won’t bite into the text if the page tears. Free margin is how much you have left to open NEW positions.

Remember, though, what we said about the spread. How you’ll always be opening a position at a loss until the BID covers the spread or the ASK for shorts. That loss is added to your used margin. The moment your position becomes profitable, the profit is deducted from your used margin and added to your free margin. On MT5 you won’t see your used margin but only your required margin. What will change is your equity – we’ll be talking about that next lesson, but in short – it’s what your account is worth at any given moment. Your balance won’t change until you close the position.

To see the required margin and leverage levels on any asset, consult the trading conditions on your broker’s web site.

Meanwhile, though, your equity and free margin will be continuously changing in line with the profit and loss on your open positions. At some point, though, you could find yourself on the verge of a negative balance. But don’t worry. Your broker won’t let that happen. Brokers are required by law to administer what we call a margin call. That means that the total amount of your free margin cannot fall below a threshold – usually 50% – of your required and used margin. Before that happens, you will receive a margin warning, and the moment you fall below the threshold, the system will automatically start closing positions. Some brokers will first close your largest positions, some your losing positions. But there’s no way of knowing if a losing position may not be about to cross over into profit.

Either way, keep your account funded and your margins wide. It’s not costing you more – just providing that extra insurance.

Now that we understand margin, we can cross to the other side of the coin and talk about leverage. It’s much simpler to understand. It’s called leverage coz that’s what the broker’s doing. He’s serving as a leverage for the funds you have. You invested 10, your position is worth 100 times that. Meaning your profits will be 100 or 200 times the size of what they WOULD have been, but so will your losses.

Margin is what makes trading worthwhile. With forex, it’s critical; with other assets it’s simply the cherry on top of the cream. Either way, keep an eye on the bottom line at all times. Your required margin may be small and remain that way – your profit and loss, free margin and equity will be bouncing around by huge increments, so be careful.