Now let us use all the margin jargon we discussed from the past lessons by looking at trading scenarios with different Margin Call and Stop Out Levels.
Series of forex brokers handle a Margin Call in different ways. Some brokers consider a Margin Call and Stop Out as just one and the same, meaning they will not send you a warning message, they will only just start closing your trades along with a message notifying you of the action just.
In this lesson, we will go through a real-life trading scenario where you are using a broker that only operates with a Margin Call. Meaning that the broker defines its Margin Call Level at 100% and does not have a separate Stop Out Level.
Here is A question, What do you think will happen when you involved in trade that goes terribly wrong？
Let's see!
Step 1: Deposit Funds Into Trading Account
Assuming you have a trading balance of $1,000, which will look like this in your account
Below is how is will look in your trading account
Step 2: Calculate Required Margin
You want to go long EUR/USD at 1.15000 and want to open a 1 mini lot (10,000 units) position. The Margin Requirement is 2%.
How much margin (Required Margin) will you need to open the position？
Since EUR is the base currency. this mini lot is 10,000 euros, which means the positions Notional Value is €10,000. Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.
$1.15 = €1
$11,500 = €10,000
The Notional Value is $11,500.
Now we can calculate the Required Margin:
Required Margin = Notional Value x Margin Requirement
$230 = $11,500 x .02
Assuming your trading account is denominated in USD, since the Margin Requirement is 2%, the Required Margin will be $230.
Step 3: Calculate Used Margin
Apart from the trade we just entered, there are no other trades open. As we have a single position open, the Required Margin will be same as used Margin.
Step 4: Calculate Equity
Lets assume that the price has moved slightly in your favor and your position is now trading at breakeven.
This means that your Floating P/L is $0.
Lets calculate your Equity:
Equity = Balance + Floating Profits (or Losses)
$1,000 = $1,000 + $0
The Equity in your account is now $1,000.
Step 5: Calculate Free Margin
Now that we know the Equity, we can now calculate the Free Margin:
Free Margin = Equity - Used Margin
$770 = $1,000 - $230
The Free Margin is $770.
Step 6: Calculate Margin Level
Since we know the Equity, we can now calculate the Margin Level:
Margin Level = (Equity / Used Margin) x 100%
435% = ($1,000 / $230) x 100%
The Margin Level is 435%.
Here, this is how your account metrics would look in your trading platform:
EUR/USD drops 500 pips!
Reports arise from the Paris of a Zombie outbreak and causes the drops of EUR/USD. EUR/USD falls 500 pips and is now trading at 1.10000.
Let us look and observe how your account is affected.
Used Margin
Due to the exchange rate has changed, the Notional Value of the position has changed. And you will observe the change In the Used Margin. And it requires recalculating the Required Margin. Whenever theres a change in the price for EUR/USD, the Required Margin changes.
With EUR/USD now trading at 1.1000 (instead of 1.15000), lets see how much Required Margin is needed to keep the position open.
As our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.
$1.10 = €1
$11,000 = €10,000
The Notional Value is $11,000.
Previously, the Notional Value was $11,500. Since EUR/USD has fallen, this means that EUR has weakened. And since your account is denominated in USD, this causes the positions Notional Value to decrease.
We can can calculate the Required Margin:
Required Margin = Notional Value x Margin Requirement
$220 = $11,000 x .02
Notice that because the Notional Value has decreased, so has the Required Margin.
Since the Margin Requirement is 2%, the Required Margin will be $220.
Previously, the Required Margin was $230 (when EUR/USD was trading at 1.15000).
The Used Margin is updated to reflect changes in Required Margin for every position open.
In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.
Floating P/L
EUR/USD has fallen from 1.15000 to 1.10000, a difference of 500 pips.
Since youre trading 1 mini lot, a 1 pip move equals $1.
This means that you have a Floating Loss of $500.
Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip
-$500 = (1.1000 - 1.15000) x 10,000 x $1/pip
Equity
The Equity is now $500.
Equity = Balance + Floating P/L
$500 = $1,000 + (-$500)
Free Margin
Your Free Margin is now $280.
Free Margin = Equity - Used Margin
$280 = $500 - $220
Margin Level
Your Margin Level has decreased to 227%.
Margin Level = (Equity / Used Margin) x 100%
227% = ($500 / $220) x 100%
Your Margin Level is still above 100% so all is still well.
Account Metrics
This is how your account metrics would look in your trading platform:
EUR/USD drops another 288 pips!
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