Trading Scenario: Margin Call Level at 100% and Stop Out Level at 50%

Stop Out Level at 50% Lesson No 39

When it comes to margin calls, different retail brokers and CFD providers work under different standards in the forex trading market. Some simply use Margin Calls, while others have separate Margin Call and Stop Out levels.

Last time, we covered a trading scenario in which your broker only offered a Margin Call policy.

Today, we’ll look at a real-world trading scenario in which a broker sets both a Margin Call Level and a Stop Out Level. The Margin Call Level is set to 100% and the Stop Out Level to 50%.

What happens in your margin account when a trade goes bad?

Let’s look into that now! 


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Step 1: Deposit Funds into Trading Account

Assume you put $10,000 in your trading account. Your account balance is now $10,000.

This is how it shows in your trading account.

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Step 2: Calculate Required Margin

Let us break out the scenario.You want to go long on GBP/USD at 1.30000 and open a position of one standard lot, which is 100,000 units. The margin requirement is set at 5%.

Now, how much margin (Required Margin) is required to initiate the position?

Given that our trading account is in USD, we must convert the GBP value to USD to get the trade’s Notional Value.

£1 = $1.30

£100,000 = $130,000

With a Notional value of $130,000, we can compute the required margin.

Required Margin = Notional Value x Margin Requirement

$6,500 = $130,000 x .05

If your trading account is denominated in USD and the Margin Requirement is 5%, the required margin is $6,500.

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Step 3: Calculate Used Margin

Aside from the deal we just started, no other trades are currently open.

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Now the fact that we only have one open position, the Used Margin will be equal to the Required Margin.

Step 4: Calculate Equity

Assume the price has moved slightly in your favour, and your position is now trading at breakeven, providing a Floating P/L of $0.

Now, let’s calculate your equity.

Equity = Balance + Floating Profits (or Losses)

$10,000 = $10,000 + $0

The Equity in your account is now $10,000.

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Step 5: Calculate Free Margin

Now that we know the equity value, we can calculate the free margin.

Free Margin = Equity – Used Margin

$3,500 = $10,000 – $6,500

There is $3,500 in your account as Free Margin.

Step 6: Calculate Margin Level

We can now calculate the Margin Level since we have the Equity value.

Margin Level = (Equity / Used Margin) x 100%

154% = ($10,000 / 6,500) x 100%

The margin level is presently set at 154%.

At this point, below is how your account metrics would display in your trading platform.

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GBP/USD falls 400 pips!

GBP/USD has lost 400 pips and is now trading at 1.26000.

Now let’s look at how this movement affects your account.

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Used Margin

Because of the fluctuating exchange rate, you may notice a change in the Used Margin. The amount of money you need to maintain your position is affected by this adjustment.

Your position requires a different quantity of money each time the GBP/USD exchange rate fluctuates.

Since the GBP/USD pair is currently trading at 1.26000 rather than 1.30000, we must determine the amount of money needed to maintain the position. As our trading account is in USD, keep in mind that in order to determine how much we need, we must convert the value of GBP to USD. 

£1 = $1.26 

£100,000 = $126,000

The current Notional Value is $126,000.

Previously, the Notional Value was $130,000. Since GBP/USD has dropped, GBP has gotten weaker. And, because your account is in USD, the position’s Notional Value decreases.

Now we can determine the Required Margin. 

Required Margin = Notional Value x Margin Requirement

$6300 = $126,000 x .05

The Required Margin has also decreased as a result of the decline in the Notional Value.

The Required Margin is now $6,300 since the Margin Requirement is set at 5%.

Before this, when the GBP/USD exchange rate was at 1.30000, the Required Margin was $6,500.

For every open position, the Used Margin is modified to reflect changes in the Required Margin.

In this case, the Used Margin and the new Required Margin will be equal because there is only one open position.

Floating P/L

GBP/USD decreased by 400 pip, from 1.30000 to 1.26000.

As you’re dealing with a single standard lot, every pip movement is worth $10.

That means you have a $4,000 floating loss. 

Floating P/L = (Current Price – Entry Price) x 10,000 x $X/pip

-$4,000 = (1.26000 – 1.30000) x 10,000 x $10/pip

Equity

As of right now, your equity is $6,000.

Equity = Balance + Floating P/L

$6,000 = $10,000 + (-$4,000)

Free Margin

Right now, your free margin is -$300.

Free Margin = Equity – Used Margin

-$300 = $6,000 – $6,300

Margin Level

The amount of your Margin Level decreased to 95%.

Margin Level = (Equity / Used Margin) x 100% 

95% = ($6,000 / $6,300) x 100%

The Margin Call Level is reached when the Margin Level hits 100%.

Your margin level is still below 100%!

At this point, you will get a Margin Call!

Consider this a warning that your deal may be immediately closed.

Your trade will remain active, but you will be unable to create additional positions until the Margin Level rises back above 100%.

Account Metrics

Here’s how your account metrics might look on your trading platform:

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GBP/USD drops another 290 pips!

GBP/USD has declined another 290 pips and is now trading at 1.23100.

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Used Margin

Now that GBP/USD is trading at 1.23100 (rather than 1.26000), we can calculate the required margin to keep the transaction open.

Because our trading account is in USD, we must convert the GBP value to USD in order to calculate the trade’s notional value.

£1 = $1.23100 

£100,000 = $123,100

There is a $123,100 notional value.

Alright, let us calculate the Required Margin.

Required Margin = Notional Value x Margin Requirement

$6,155 = $123,100 x .05

The Required Margin decreased as a result of the Notional Value’s decrease.

The Required Margin is now $6,155 since the Margin Requirement is set at 5%.

Before that, when the GBP/USD exchange rate was at 1.26000, the Required Margin was $6,300.

For every open position, the Used Margin is modified to reflect changes in the Required Margin.

In this case, the Used Margin and the new Required Margin will be equal because there is only one open position. 

Floating P/L

The GBP/USD exchange rate has decreased by 690 pip, from 1.30000 to 1.23100.

Every $10 pip movement is associated with a trading size of one standard lot.

That means you have a $6,900 floating loss.

Floating P/L = (Current Price – Entry Price) x 10,000 x $X/pip

-$6,900 = (1.23100 – 1.30000) x 10,000 x $10/pip

Equity

You now have $3,100 in equity.

Equity = Balance + Floating P/L

$3,100 = $10,000 + (-$6,900)

Free Margin

You now have a negative $3,055 free margin.

Free Margin = Equity – Used Margin

-$3,055 = $3,100 – $6,155

Margin Level

The amount of your margin has dropped to 50%.

Margin Level = (Equity / Used Margin) x 100% 

50% = ($3,100 / $6,155) x 100%

Your margin level is currently decreasing below the stop-out level!

Account Metrics

Your trading platform would display your account metrics as follows:

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STOP OUT!

The Stop Out Level is reached when the Margin Level falls below 50%.

At this point, your margin level has reached the Stop Out Level!

Your trading platform will automatically initiate a stop out.

This indicates that your trade will close automatically at the current market price.

  • The Used Margin will be “released”.
  • Your floating loss will be “realised”.
  • Your balance will be updated to reflect the realised loss.

Your Free Margin, Equity, and Balance will remain unchanged now that your account is “flat” and has no open positions.

There is no Margin Level or Floating P/L because no positions are open. 

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Let’s look at how your trading account has changed from beginning to end.

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You had $10,000 in cash before the trade. You now have $3,100 left over!

69% of your capital has been lost.

% Gain/Loss = ((Ending Balance – Starting Balance) / Starting Balance) x 100%

-69% = (($3,100 – $10,000) / $10,000) x 100%

Some traders may struggle to accept the fact that their trade has been automatically closed.

In the next session, we’ll look at a new trading scenario in which you attempt to trade forex with only $100.

Is it a good idea to trade with such a small amount? Let us see what happened to the trader who tried it.