27-Another Two Keywords You Must Know: Used Margin and Equity.

In this lesson, we shall bring two more terminologies involved in margin trading: Used Margin and Equity.


Used Margin


To comprehend what Used Margin is, you must clearly know what Required Margin. So, let us first brush up about Required Margin and then get to Used Margin.


Required Margin, as the name pretty much suggests, is the specific amount of capital required to open a position.


In our previous lesson, we considered examples only for a single position. Here, let us understand the concept by considering multiple positions.


If there is more than one position running on your account, each position will have its own Required Margin. And this is collectively known as Used Margin.


In other words, Used Margin is the sum of Required Margin for all open positions. This margin is locked up by the broker and cannot be used to buy new positions. Hence, it goes by the name, Used Margin.


Now, let us get this concept cemented by considering an example.


Let’s say you deposited $5,000 in your margin account and you wish to open two positions: USD/CAD and USD/CHF


USD/CAD

Let’s assume your account is dominated in US dollars and you wish to go long 10,000 units. If the Margin Requirement is 2%, the Required Margin turns out to be $200.


Required Margin = Notional Value x Margin Requirement


= $10,000 x 0.02


Required Margin = $200


USD/CHF

Here, let’s say you want to go long 100,000 units on USD/CHF whose Margin Requirement is 3%. So, the Required Margin for this position will be,


Required Margin = Notional Value x Margin Requirement


= $100,000 x 0.03


Required Margin = $3000


Thus, the Required Margin for USD/CHF is $3000.


Now, since you have two positions running at the same time, room for Used Margin opens up.


Used Margin = Sum of Required Margin of all open positions


Used Margin = Required Margin (USD/CAD) + Required Margin (USD/CHF)

= $200 + $3000


Used Margin = $3200


Hence, from the above calculations, the Used Margin turns out to be $3200.


 Equity


Equity is simply the current value of your margin account. When you’re in a trade, it continually fluctuates with every tick. So, if your trade is running in profit, the Equity value rises; and if the trade is running negative, the Equity falls.


How to calculate Equity?

Equity is the sum of the Account Balance and the Unrealized P/L currently open in your account.


Equity value when no trades are open

If no trades are open, then the Unrealized P/L automatically turns out to be 0. Hence, Equity will be equal to the Account Balance.


Equity = Account Balance


Equity value when there are positions open

When any position is open, the Unrealized P/L comes into play. That is the Equity changes as and when the position fluctuates. Hence,


Equity = Account Balance + Floating (Unrealized) P/L

Furthermore, for multiple trades, the Equity is calculated by adding the Floating P/L for all the running positions.


Credit 

Caution:

Trading involves the possibility of financial loss. Only trade with money that you are prepared to lose, you must recognize that for factors outside your control you may lose all of the money in your trading account. Many forex brokers also hold you liable for losses that exceed your trading capital. So you may stand to lose more money than is in your account. Smart Analysis Pvt takes not responsibility for loss incurred as a result of our trading signals. By signing up as a member you acknowledge that we are not providing financial advice and that you are making a the decision to copy our trades on your own account. We have no knowledge on the level of money you are trading with or the level of risk you are taking with each trade. You must make your own financial decisions, we take no responsibility for money made or lost as a result of our signals or advice on forex related products on this website.

PayPal

Credit  & Debit Card

  • Black Facebook Icon
  • Black Instagram Icon
  • Black YouTube Icon

© 2023 by Personal Life Coach. Proudly created with Wix.com