Home Courses Course-01 Another Two Keywords You Must Know: Used Margin and Equity.

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

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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.

Thus, this completes the lesson on Used Margin and Equity. Check your learnings below.

What is the prerequisite to understand Used Margin?

Correct! Wrong!

Used Margin is the sum of Required Margin for all positions.

Correct! Wrong!

Calculate the Used Margin of an account who’s Required Margin for two trades is as follows: Required Margin for 1st trade = $250 Required Margin for 2nd trade = $270

Correct! Wrong!

Equity is the ______ of your margin account?

Correct! Wrong!

If there are no trades open, which of the following component will become zero while calculating the Equity?

Please select 2 correct answers

Correct! Wrong!

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