What Is Margin in Trading?
What is margin in trading? Explore initial margin, maintenance margin, free margin, margin level calculations, and liquidation stop-out rules.
Margin in financial trading is the cash collateral required by a broker to open and maintain a leveraged position.
Margin is not a fee, transaction cost, or commission. It is a portion of your account balance that is locked while a position remains open. Once you close the position, the locked margin is released back to your available funds, adjusted for your realised profit or loss.
Key Takeaways
- Margin is a collateral deposit, not an expense or transaction fee.
- Initial margin is the collateral needed to open a position; on MT5, your position stays open until equity hits the account stop-out level.
- Free margin is the buffer that absorbs floating losses and allows new positions to be opened.
- Margin Level (%) measures account health: (Equity / Used Margin) × 100.
Core Margin Metrics on MetaTrader 5
On trading terminals like MetaTrader 5, margin operates within an interconnected set of live account metrics:
- Used Margin: The total cash collateral currently locked across all active trades.
- Free Margin: The remaining equity available to absorb losses or open new trades: Free Margin = Equity - Used Margin.
- Margin Level (%): The primary measure of account solvency: Margin Level = (Equity / Used Margin) × 100.
To explore how Balance, Equity, and Free Margin interact during open trades, see our dedicated guide on balance vs equity vs free margin.
Step-by-Step Margin Calculation Example
The Calculation Formula: Formula: Required Initial Margin = (Contract Size × Current Asset Price) × Margin Percentage
Consider a trader opening 1 standard lot of EUR/USD using 1:200 leverage (0.5% margin):
- Trade Volume: 1.00 Lot (100,000 EUR base currency)
- Asset Price: 1.0850 ($108,500.00 total nominal position value)
- Margin Percentage: 0.5% (1 / 200)
- Required Margin: $108,500.00 × 0.005 = $542.50
The broker locks $542.50 of your account equity. If you have a $5,000 account balance, your Used Margin becomes $542.50, and your Free Margin is $4,457.50.
Account Health Under Adverse Market Conditions
Illustrative Stress Scenario: (Note: The figures below are illustrative to demonstrate mathematical margin dynamics. Exact Margin Call and Stop-Out percentage triggers vary by broker and account type, and are detailed in your verified account terms.)
| Account State | Equity | Used Margin | Free Margin | Margin Level (%) | Account Status (Illustrative) |
|---|---|---|---|---|---|
| Trade Entry | $2,000.00 | $500.00 | $1,500.00 | 400% | Healthy Solvency Buffer |
| Floating Loss of $1,000 | $1,000.00 | $500.00 | $500.00 | 200% | Buffer Reduced by 66% |
| Floating Loss of $1,500 | $500.00 | $500.00 | $0.00 | 100% | Free Margin Depleted (Illustrative Margin Call Level) |
| Floating Loss of $1,750 | $250.00 | $500.00 | -$250.00 | 50% | Illustrative Stop-Out Trigger (Automated Liquidation) |
As shown in this illustrative scenario, when floating losses reach $1,500, Free Margin drops to zero and Margin Level hits 100%. At this point, the account cannot open new positions. If losses deepen to $1,750, Margin Level reaches 50%, triggering automated stop-outs to protect the account from deeper capital loss (as explained in our guide on how leverage increases trading risk).
Managing Margin and Capital Risk
- Maintain Free Margin Buffers: Many traders keep a large free margin buffer to absorb unexpected volatility without stressing their account.
- Use Pre-Set Stop-Loss Orders: Many traders set a stop-loss order (see our stop-loss orders guide) to cap floating losses before they threaten your account equity.
- Monitor Correlated Exposures: Opening multiple trades across correlated markets increases used margin while multiplying exposure to the same market trend.
Is margin a fee charged by the broker?
No. Margin is cash collateral locked to support an open position. It is returned to your account once the trade is closed, adjusted for profit or loss.
What happens if my Free Margin becomes negative?
When Free Margin becomes negative, your equity has dropped below your used margin. You cannot open new positions, and your existing positions are at risk of automated stop-out.
How is the Margin Level percentage calculated?
Margin Level is calculated by dividing account Equity by Used Margin, multiplied by 100: (Equity / Used Margin) × 100.
What is the difference between initial margin and maintenance margin on MT5?
MetaTrader 5 lists both in each instrument's contract specification. Initial margin is what you need to open the position; maintenance margin is what you need to keep it open. Many brokers set the two equal, in which case the distinction is invisible in day-to-day trading. What actually triggers a stop-out is the account's Margin Level percentage falling to the stop-out threshold. MarketsAll's settings for each instrument are in its contract specification.
What is a margin call?
A margin call is an alert triggered when your account equity falls close to your required margin, warning you that positions may be closed if additional funds are not deposited or positions closed.
Can margin requirements change?
Yes. Brokers may adjust margin requirements ahead of high-volatility events, such as elections or weekend closures, to protect clients and the platform from severe gap risk.
Related Terms
What is CFD trading · What is leverage · Pip value · Lot size · Position sizing · Gap risk · Contract specifications on MT5
Put this into practice
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