How to calculate margin and leverage.
I mentioned leverage and margin yesterday and I’d like to complete the explanation today.
The effect of leverage on your account is like a magnifying glass. If you’ve got 100:1 leverage and your initial capital is $1,000 this means your margin level will be at 100,000%. Let’s say you place a trade for 0.1 (one mini-lot) of NZDUSD which uses $63.75 of margin (nzdusd is currently at 0.6375) this is what you’ll see:
Now, if your leverage was 200:1, this means the cost of the trade would be half of the above, or 31.88. See how this affects your margin level:
You guessed it, it’s now twice as much.
So, how is all this calculated?
Your BALANCE is your initial capital + any closed trades (positive and negative).
Your EQUITY is your balance + your current profit or loss.
As we’ve seen, your MARGIN is the amount it costs you to enter a trade, based on your leverage and which pair you’re trading.
Your FREE MARGIN is your balance minus your used margin + your current profit or loss.
And your MARGIN LEVEL is your equity divided by your margin.
