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What is Margin Call?


Why is that Margin Call pops up easily in your trading? What is the importance of it in your trades?

First, let's tackle what Margin really is. Margin in forex trading is the collateral that your broker requires to ensure that you can cover any losses you might take on your positions. The margin available will limit the size of your position. It is used by the broker to maintain your position. Your broker basically takes your margin deposit and pools them with everyone else’s margin deposits, and uses this one deposit to be able to place trades with the interbanks.

If you’re broker offers a leverage of 100:1, you’re margin will be 1%; if a broker requires a margin of 2%, you’re leverage will be 50:1 (100:2). The normal trade margins are 100:1 and 150:1, or even 200:1 trade margins.

By utilizing margin, traders are increasing their purchasing power so that they can own more lots without fully paying for it.

The amount of leverage you use will depend on your broker and what you feel comfortable with. There was a time when it was difficult to find companies prepared to offer margin accounts but nowadays you can get leverage from a high as 1% with some brokers. This means you could control $100,000 with only $1,000.

Typically the broker will require a minimum account size, also known as account margin or initial margin e.g. $10,000. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.

For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000.

The minimum security (Margin) for each lot will very from broker to broker. In the example above the broker required a one percent margin. This means that for every $100,000 traded the broker wanted $1,000 as security on the position.

You might be wondering how to get margin and leverage. Here's a little formula for you to learn how.

Margin Formula: M (Margin) =100/L (Leverage)

Example 1: your leverage is 50:1

M=100/L
M=100/50
M=2

Your margin in this case is 2%

Leverage Formula: L=1/M=1M*100

(Leverage equals 1 devided by margin value times 100 )

So, if you know the margin, just divide the margin from 1 and than multiply the sum by 100

Example 2:

Let’s say Margin is 0.5%, so M=0.5

L=1/M=1M*100
L=1/0.5=2*100
L=200

Your leverage in this case is 200:1

If you use the entire usable margin, that is the time you'll get a margin call. So If the equity in the account drops below your usable margin, a margin call will occur and this is where all of the trader’s open positions are being automatically closed, thus preventing the trader from entering into debt.

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2 comments:

Tony Chan said...

good education value here...love it. Thanks!

tony http://tonycblogs.blogspot.com

Bhing said...

@Tony Chan - Thanks for the support :) Keep coming back.. I will try to post new articles..

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