Trading Scenario: Margin Call Level at 100% and No Separate Stop Out Level

Margin Call Level at 100% and No Separate Stop Out Level: Lesson No 38

Okay, let’s get started applying the margin ideas we learned in previous lessons to various trading scenarios using various Margin call and Stop Out Levels.

Different forex brokers and CFD providers have different margin call policies. Some just use Margin Calls, while others have both Margin Call and Stop Out Levels.

In today’s session, we’ll look at a real-world trading scenario with a broker that only accepts Margin Calls. This broker sets its Margin Call Level at 100% and does not have a separate Stop Out Level.

What happens to your margin account when a trade fails?

Let us find out together!
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Step 1: Deposit Funds Into Trading Account

Assume that you have $1,000 in your account.

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It would seem like this in your trading account,


Step 2: Calculate Required Margin

Let’s say you wish to purchase EUR/USD at 1.15000 and initiate a trade with one mini lot, which equals 10,000 units. The margin requirement for this trade is 2%.

So, how much margin (Required Margin) do you need to open this position?

Because EUR is the base currency, this small lot equals 10,000 euros, hence the position’s Notional Value is €10,000.

Because our trading account is in USD, we must convert the EUR value 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 compute the required margin,

Required Margin = Notional Value x Margin Requirement

$230 = $11,500 x .02

Let’s imagine your trading account is in US dollars. With a 2% margin requirement, you’ll need $230 for the required margin.

Step 3: Calculate Used Margin

Aside from the trade we just completed, we don’t have any other trades open.

Because we only have one open position, the Used Margin is equal to the Required Margin.

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Step 4: Calculate Equity

Assume the price has adjusted slightly in your favour, and your position is now trading at profitability.

So your Floating P/L is $0.

Now let’s calculate your equity. 

Equity = Balance + Floating Profits (or Losses)

$1,000 = $1,000 + $0

Your account’s equity is now $1,000.

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Step 5: Calculate Free Margin

Now, let’s understand the concept of Free Margin:

Free Margin = Equity – Used Margin

$770 = $1,000 – $230

It is $770 for the free margin.

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Step 6: Calculate Margin Level

After learning about equity, let’s calculate the margin level.

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

435% = ($1,000 / $230) x 100%

The Margin Level is 435%.

Your trading platform will now show the following account metrics:

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EUR/USD drops 500 pips!

There is a zombie outbreak in Paris, according to recent reports.

The EUR/USD has consequently decreased by 500 pip and is presently trading at 1.10000.

Let’s now look at how this affects your trading account. 

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Used Margin

You’ll see that the Used Margin has moved.

Why? Because the currency rate fluctuated, the Notional Value of the position shifted accordingly.

So we need to compute the Required Margin.

Whenever the EUR/USD price changes, so does the Required Margin.

For example, with EUR/USD currently trading at 1.1000 (formerly 1.1500), we may calculate the Required Margin needed to keep the position open.

Because our trading account uses USD, we must convert the EUR value to USD to get the trade’s Notional Value. 

$1.10 = €1 

$11,000 = €10,000

Now, let us discuss the Notional Value, which is $11,000.

Earlier, it was $11,500. With the EUR/USD falling, it indicates a weaker EUR. Because your account is in US dollars, the position’s Notional Value decreases.

So, let’s figure out the required margin. 

Required Margin = Notional Value x Margin Requirement

$220 = $11,000 x .02

Now, observe that when the Notional Value declined, so did the Required Margin.

Given the 2% Margin Requirement, the required margin is $220.

Previously, it was $230 (when EUR/USD was at 1.1500).

The Used Margin is modified to reflect changes in the Required Margin for each open position.

In this situation, with only one open position, the Used Margin equals the new Required Margin. 

Floating P/L

EUR/USD fell from 1.15000 to 1.10000, a 500-pips difference.

If you’re trading one micro lot, each 1 pip fluctuation represents $1.

So you’re looking at a $500 Floating Loss. 

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

You now have $500 in equity.

Equity = Balance + Floating P/L

$500 = $1,000 + (-$500)

Free Margin

You now have $280 in free margin.

Free Margin = Equity – Used Margin

$280 = $500 – $220

Margin Level

The amount of your margin has decreased to 227%.

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

227% = ($500 / $220) x 100%

Everything is still OK since your margin level is still higher than 100%.

Account Metrics

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

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EUR/USD drops another 288 pips!

EUR/USD decreased a further 288 pips and is now trading at 1.07120.

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Used Margin

Now that EUR/USD is trading at 1.07120 (rather than 1.10000), let’s calculate the Required Margin to maintain the position.

Because our trading account uses USD, we must convert the EUR value to USD to get the trade’s Notional Value.

$1.07120 = €1 

$10,712 = €10,000

The Notional Value stands at $10,712.

Now, let’s calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement

$214 = $10,712 x .02

Observe that when the Notional Value fell, so did the Required Margin.

With a margin requirement of 2%, the Required Margin is now $214.

Previously, it was $220 (when EUR/USD traded at 1.10000).

The Used Margin updates to reflect changes in the Required Margin for each open position.

With only one position open, the Used Margin matches the new Required Margin. 

Floating P/L

EUR/USD fell by 788 pips, from 1.15000 to 1.07120.

Given that you are trading one micro lot, each pip movement is worth one dollar.

So, you’ve arrived at a $788 floating loss. 

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

-$788 = (1.07120 – 1.15000) x 10,000 x $1/pip

Equity

There is $212 left in your equity.

Equity = Balance + Floating P/L

$212 = $1,000 + (-$788)

Free Margin

Now, your free margin is –$2.

Free Margin = Equity – Used Margin

-$2 = $212 – $214

Margin Level

The amount of your margin has decreased to 99%.

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

99% = ($212 / $214) x 100%

Your margin level is currently less than the margin call level!

Account Metrics

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

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MARGIN CALL!

Your trading platform will automatically close your trade!

When a trade closes, two things happen:

  • Your Used Margin is “released.”
  • Your Floating Loss is “realised,” which updates your Balance to reflect the loss.

With no open positions, your account is “flat,” which means your Free Margin, Equity, and Balance are all equal.

There are no open positions, so there is no Margin Level or Floating P/L to consider. 

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Let’s examine the overall changes to your trading account.

You started with $1,000 before the trade. You now have $212 left over!

79% of your capital has been lost.

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

-79% = (($212 – $1,000) / $1,000) x 100%

Some traders are in a difficult situation when their trade is automatically liquidated.

In the next session, we’ll look at a different trading scenario in which your broker sets a separate Margin Call and Stop Out Level.

Let’s compare what happens there to what happened here.