Trading Scenario: What Happens If You Trade With Just $100?

What Happens If You Trade With Just $100? Lesson No 40

Imagine starting a trading account with just $100, €100, or £100. Margin trading allows you to begin forex trading with a little deposit. But is it wise to do so? Let’s investigate what might happen in this case.

In this trading situation, your retail forex broker sets the Margin Call Level to 100% and the stop-out level to 20%. 

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Now that we’ve covered the basics of Margin Call and Stop Out Levels, let’s see if trading with just $100 is possible.

Step 1: Deposit Funds into Trading Account

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Because you’re anxious to get started, you put $100 into your trading account, giving you a total account balance of $100. This is how it shows in your trading account.

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Step 2: Calculate Required Margin

Assuming you are interested in trading EUR/USD at 1.20000, open 5 micro lots (1,000 units x 5). The margin requirement is 1%. How much margin

(“Required Margin”) do you need to open this position? Because our trading account is in USD, we must convert the EUR value to USD to calculate the Notional Value of the trade.

€1 = $1.20

€1,000 x 5 micro lots = €5,000 

€5,000 = $6,000

The Notional Value is $6,000. With this information, we can determine the required margin.

Required Margin = Notional Value x Margin Requirement

$60 = $6,000 x 0.01

The Required Margin would be $60 as your trading account is in US dollars and requires a 1% margin.
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Step 3: Calculate Used Margin

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Aside from the trade we just entered, there are no other open trades. With only one open position, the Used Margin is equal to the Required Margin.

Step 4: Calculate Equity

Assume the price has moved slightly in your favor and your position is now trading at profitability, meaning your Floating P/L is $0. Now, let’s compute your equity.

Equity = Balance + Floating Profits (or Losses)

$100 = $100 + $0

You currently have $100 in Equity in your account.

Step 5: Calculate Free Margin

We can now calculate the Free Margin as we know the Equity:

Free Margin = Equity – Used Margin

$40 = $100 – $60

The Free margin is set at $40.

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Step 6: Calculate Margin Level

We can calculate the Margin Level as we know the Equity:

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

167% = ($100 / 60) x 100%

There is a 167% margin level.

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Right now, your trading platform’s account data would look like this:

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EUR/USD rises 80 pips!

The current market value of EUR/USD is 1.2080, after rising by 80 pip.

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Let’s evaluate how this will affect your account.

Used Margin

You will notice that the Used Margin has changed.

The position’s Notional Value changed as a result of the fluctuating exchange rate. This implies that the Required Margin has to be adjusted.

The Required Margin fluctuates with any EUR/USD exchange rate changes!

Now that the EUR/USD pair is trading at 1.20800 rather than 1.20000, let’s calculate the Required Margin required to keep the position open.

We will convert the EUR value to USD as our trading account is in USD to determine the trade’s notional value. 

€1 = $1.2080 

€1,000 x 5 micro lots = €5,000  

€5,000 = $6,040

The current Notional Value is $6,040.

Previously, the Notional Value was at $6,000. The increase in EUR/USD implies that the euro has gained strength. Because your account is in USD, this raises the position’s Notional Value.

Now we can calculate the required margin.

Required Margin = Notional Value x Margin Requirement

$60.40 = $6,040 x 0.01

The Required Margin has increased along with the Notional Value.

The Required Margin is $60.40 given the 1% Margin Requirement.

The required margin was $60.00 at the time the EUR/USD traded at 1.20000.

Every open position’s Used Margin is adjusted to reflect changes in the Required Margin.

Since there is only one open position, in this case, the Used Margin and the new Required Margin are equal. 

Floating P/L

The EUR/USD pair has increased, moving from 1.2000 to 1.2080, a difference of 80 pip.

A 1 pip change equals $0.10 per micro lot since you are trading micro lots.

Since you have five micro lots in your position, one pip change is equivalent to $0.50.

There is a $40 floating loss as a result of your short position in EUR/USD.

Floating P/L = Position Size x (Current Price – Entry Price)

Floating P/L = 5,000 x (1.20800 – 1.20000)

Floating P/L = -$40

Equity

You now have $60 in equity.

Equity = Balance + Floating P/L

$60 = $100 + (-$40)

Free Margin

Right now, your free margin is $0.

Free Margin = Equity – Used Margin

-$0.40 = $60 – $60.40

Margin Level

The amount of your margin has decreased to 99%.

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

99% = ($60/ $60.40) x 100%

Your margin level currently lies below 100%!

At this point, you will receive a Margin Call, which serves as a warning.

Your existing positions will remain open, however…

You will not be able to initiate new trades until the Margin Level rises above 100%. 

Account Metrics

In your trading platform, your account data might appear like this:

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EUR/USD rises another 96 pips!

The EUR/USD pair now trades at 1.2176 after rising by 96 pip.

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Used Margin

Now that the EUR/USD is trading at 1.21760 (rather than 1.20800), we can calculate the required margin to maintain the position.

Because our trading account is in USD, we must convert the EUR value to USD to determine the Notional Value of the trade.

€1 = $1.21760

€1,000 x 5 micro lots = €5,000  

€5,000 = $6,088

At this point, the Notional Value is $6,088.

Now let’s figure out the Required Margin.

Required Margin = Notional Value x Margin Requirement

$60.88 = $6,080 x 0.01

The Required Margin has increased as a result of the increase in the Notional Value.

The required margin, with a 1% margin requirement, is currently $60.88.

Before, when the EUR/USD traded at 1.20800, the Required Margin was $60.40.

Every open position’s Used Margin is adjusted to reflect changes in the Required Margin.

Since there is only one open position, in this case, the Used Margin and the new Required Margin are equal. 

Floating P/L

The EUR/USD pair has increased by 176 pip, from 1.20000 to 1.217600.

A change of one pip in your five micro lots trade is equal to $0.50.

This generates a $88 floating loss due to your short position.

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

-$88 = (1.21760 – 1.20000) x 10,000 x $0.50/pip

Equity

There is now $12 in your equity.

Equity = Balance + Floating P/L

$12 = $100 + (-$88)

Free Margin

At this moment, your free margin is -$48.88.

Free Margin = Equity – Used Margin

-$48.88 = $12 – $60.88

Margin Level

The amount of your margin has decreased to 20%.

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

20% = ($12 / $60.88) x 100%

Your margin level is now below the stop-out level at this moment!

Account Metrics

In your trading platform, your account data may look like this:

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Stop Out!

The Stop Out Level is activated when the Margin Level falls below 20%.

When your Margin Level reaches the Stop Out Level, your trading platform will automatically execute a Stop Out.

This action causes your trade to automatically close at the market price, which causes two outcomes:

  • Your Used Margin becomes “released”.
  • Your floating loss is “realized”.
  • Your balance will be changed to reflect the realized loss.

Your account goes “flat” when there are no open positions. As a result, your Free Margin, Equity, and Balance remain the same.

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

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

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Before the trade, you had $100 in cash.

Now, after just ONE TRADE, you only have $12 left!

That’s not even enough to cover one month of Netflix!

You’ve lost 88% of your capital.

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

-88% = (($12 – $100) / $100) x 100%

EUR/USD only moved 176 pip, then!

It may not seem like much. But believe me, in only a day or two, the EUR/USD can change that much. (MarketMilkTM allows you to view real-time EUR/USD volatility.)

Congratulations! Your account has just been emptied! 👏
Your trading account is essentially finished now that your balance is too low to initiate any further trades.