The size of contracts in Forex

In the currency market, so-called lots, mini lots and micro-lots are bought and sold.

1 lot is equivalent to 100,000 base currency and in the MT4 volume field it is expressed with 1.00;
1 mini lot is equivalent to 10’000 of base currency and in the Metatrader 4 it appears as 0.1 in the volume field;
1 micro lot is equivalent to 1’000 of base currency and in the volume field of MT4 it is expressed with 0.01.

Leverage

Since forex is a very liquid market and most traders who operate there keep their operations open only for a short period of time, the broker gives the possibility to buy / sell a certain amount even if he does not actually have it on the account, requesting only a deposit to guarantee the operation called margin in MT4.

This mechanism is called financial leverage

With a brief example, through leverage you can buy 1 whole lot of Euro / Dollar (100 thousand euros) with just over 200 euros of deposit on a trading account with a leverage of 1: 500, the difference is lent by the broker.

The required margin

As anticipated before, to guarantee this loan the broker requires a deposit (called Margin in the MT4), the amount of deposit required depends on how much the trader has bought / sold and the leverage of his trading account according to the following formula:

Amount sold or bought / account leverage = required margin

To give a practical example, imagine buying 1 lot (written 1.00 in MT4 and equivalent to 100 thousand euros) on a trading account with a maximum leverage of 200, the margin required as collateral will be 500 euros. The calculation performed is as follows:
€ 100,000 / 200 = € 500

These € 500 are “blocked” money to guarantee the € 100,000 transaction.

Where do I find how much money is used as a margin in the MT4?

The amount of money used as a margin for open transactions can be found in the Terminal
window and, precisely, in the last gray line.

The figure “Free Margin” shows how much money, compared to the value of your account, is
available to be used as a margin. It can be calculated by doing:
Equity – Margin = Free margin

The result of open operations (loss or profit) will increase or decrease the amount of free
margin.

What happens if, in the case of a major loss on one or more open transactions, the free margin
becomes zero?

Since the money used as a deposit for open transactions (Margin) can NOT be used to offset
the losses of open transactions, if the free margin becomes zero, the platform will
automatically trigger the Stop Out mechanism and close the transaction with the highest loss.

What is the stop out?

The stop out is an automatic mechanism of the MT4 that closes the operation with the highest
loss among those open whenever the free margin reaches zero. (That is when the loss of open
operations is going to erode the capital put into deposit of the same operations).

When the Metatrader 4 triggers the Stop Out and closes one or more operations, it writes in the
comments of the closed operation SO:


The Metatrader 4 has a system that warns traders when the free margin is about to reach zero.
This warning is called “Margin Call” and is activated when the margin level reaches 120%.

It is strictly advised to keep the margin level always above 400/500% to prevent the Metatrader
from triggering the Stop Out and closing the operations automatically.

What is the “margin level” and the “margin call”?

The margin level, the last value to the right of the gray line, is a percentage that indicates the
risk of exhaustion of the available margin and consequent Stop Out.

The percentage value is the result of the following calculation:
Equity / Margin * 100 = Margin level

The lower this value decreases, the higher the risk of Stop Out.

When this value reaches 120% the MT4 will activate the Margin Call, emit a sound and the open
operation bar will become red.

The difference between the leverage used and the account leverage.

Contrary to what many traders believe the leverage of the account does not directly affect how
much it buys / sells but only what is required for margin.

The leverage used is decided by the trader for each operation, and you can know it by doing the
simple calculation:
Amount bought / money on the account.

So, for example, by having a 1000 euro balance and buying a lot (1.00 then 100 thousand
euros), you will be using a lever of:
€ 100,000 / € 1000 = 100 leverage used.

Even if the customer who did the operation described above had the 1: 500 leverage account,
his effective leverage would be 1: 100 because what matters is how much he buys or sells with
respect to his balance.