Before proceeding to the presentation of the material of this lesson, I would like to note its exceptional importance, since margin trading has always caused the greatest number of questions. Understanding the essence of margin trading is another necessary step towards a successful trading future. And if you approach the development of this lesson with special care, you can be sure that your formation as a professional speculator in the financial markets will be almost over.
Unlike other financial markets, where your deposit must fully match your trading volume, only a part of it is required in the Forex market. The remaining amount will be provided by your broker. AMarkets, providing support to newcomers, allows you to trade currency for an amount 500 times higher than your deposit, but only on condition that you are not afraid to take risks. In simple terms, to open one trading position, you will need only 1:500 of your balance.
You decide to purchase 1 lot (100,000 units of currency) for the EUR/USD pair. You are given the opportunity of margin trading with a leverage of 1:500, which means that in order to purchase $ 100,000, i.e. one standard lot, you will only need 200$ (100 000$/500= 200$).
Remember, the greater the leverage, the greater the load on your deposit, and the greater the potential profit and probable losses.
Margin calls are the worst enemies of all traders.
Unfortunately, investors often find themselves on the threshold of this unpleasant system message. This happens due to lack of experience, theoretical unpreparedness, non-compliance with elementary risk management or simply ignoring the specifics of safe trading. Margins arise when the account balance drops below a certain level that does not allow you to open at least one position, for example, $ 200 when using the leverage of 1:500 or $ 1000 when using the leverage of 1:100 for one standard lot. In order to prevent the trader's losses from exceeding the margin and free funds on the trading account, the broker sets a critical loss level based on the parameter described above and, upon reaching which, unprofitable positions are automatically closed at the current market price. Thus, a positive account balance is maintained.
In other words, you cannot lose more funds than in your account, respectively, you cannot remain indebted to the brokerage company.
So how to calculate the margin? Most brokers calculate this value automatically, but we believe it will not be superfluous to be able to do it yourself.
Calculation for direct quotes (dollar is the quote currency):
Let's say using a leverage of 1:100, we buy 1 lot of EUR/USD at a price of 1.3000, i.e. we buy 100,000 euros for 130,000 US dollars. Thus, the margin in this transaction will be 1300.0 USD, i.e. 100 times less than required (100,000 euros / 100 = 1000 EUR, then 1000 * 1.3000 = 1300 USD).
If we used leverage of 1:200, respectively, the margin would be 650.15 USD (130030/200).
Calculation for reverse quotes (dollar is the base currency):
Let's say using a leverage of 1:100, we buy 1 lot USD/CHF at a price of 0.9330, i.e. we buy 100,000 USD for 93,300 Swiss francs, and the margin is $ 1,000 (100,000 / 100).
Undoubtedly, the best way to understand the essence and causes of a margin call is to face it. You don't need to consciously go to him, because we modeled this situation especially for you.
So, let's "catch" margin call:
Let's take a concrete example:
Mr. Ullman opened an account for trading on the Forex market, deciding to start with an initial deposit of 4000 USD.
For a reason known only to him, he bought 2 lots for the EUR/USD pair at a price of 1.3000. Considering that Ullman uses leverage of 1:100, this transaction required margin collateral in the amount of $2,600 (200,000 /100*1,3000). After opening the deal, Ullman closed the trading platform and went about his daily business.
Waking up the next morning, Ullman decided to check how things were going on his trading account. I started the computer, opened the trading terminal, and damn it! EUR collapsed by more than 100 points. When he "entered" the market by purchasing 2 lots of European currency, his margin was $ 2,600, therefore, he had $ 1,400 left in free funds. 100 points of downward movement on a 2-lot deal is $ 2,000.
That night, the euro fell by 117 points, and the broker decided to forcibly close the positions.
The lesson is prepared by Amarkets