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Understanding the Margin Call

  • #1
  • First Post: Sep 21, 2006 8:58am Sep 21, 2006 8:58am
If I have an account with 1000$ in it, and a 100:1 margin, how far in the negative would my position have to move against me for my broker to enact a margin call against me? Or is my understanding of the margin call "off" somehow? Thanks.
Binary Options Trader
  • #2
  • Sep 21, 2006 9:22am Sep 21, 2006 9:22am
Quoting Yoda_Glenn
If I have an account with 1000$ in it, and a 100:1 margin, how far in the negative would my position have to move against me for my broker to enact a margin call against me? Or is my understanding of the margin call "off" somehow? Thanks.
Depends on your trade size.

Let's say you trade 1 mini of currency/pair XXX/USD that has a rate of 1.000 (for simplicity). That means you spend approximately $100 for 100,000 XXX.

Your margin balance is now $900 (USD). Because you are pair XXX/USD is XXX-based, your per pip P/L will be $1 (USD).

You could effectively withstand 900 pips...

The key is your MARGIN BALANCE cannot hit 0...or you will get a margin call.

This task becomes slightly more complicated if your trading pairs USD/XYZ (USD based) because the per pip P/L will fluctuate as USD/XYZ moves up and down.

Just watch your MARGIN BALANCE and make sure it stays above 0.
  • #3
  • Sep 21, 2006 11:58am Sep 21, 2006 11:58am
Thanks for the response.

On my MGDemo I see two margin columns. One says "Usable Margin," and the other one one says "Req Margin." Which margin should I pay attention to, or which margin should not hit 0, in order for me to avoid a margin call?

Also, if there is a margin call, does this mean that the broker takes away the cash that was used in the trade, or any cash within the account in general?
Binary Options Trader
  • #4
  • Sep 21, 2006 12:07pm Sep 21, 2006 12:07pm
IBFX, actually allows you to go negative. e.g. you have mini account
you have a balance of $550.00 you buy one standard lot GPB/USD with spread of 3 pips you now have $20.00 margin left, they will allow you to get negative $270.00 which leaves $250.00 equity.. I trade the news with mini account becasue of leverage and no stops bad thing about IBFX is they allow max buy of 50 mini's 5 standard lots at a time
Quoting mrmikal
Depends on your trade size.

Let's say you trade 1 mini of currency/pair XXX/USD that has a rate of 1.000 (for simplicity). That means you spend approximately $100 for 100,000 XXX.

Your margin balance is now $900 (USD). Because you are pair XXX/USD is XXX-based, your per pip P/L will be $1 (USD).

You could effectively withstand 900 pips...

The key is your MARGIN BALANCE cannot hit 0...or you will get a margin call.

This task becomes slightly more complicated if your trading pairs USD/XYZ (USD based) because the per pip P/L will fluctuate as USD/XYZ moves up and down.

Just watch your MARGIN BALANCE and make sure it stays above 0.
THE MAN
  • #5
  • Sep 21, 2006 12:08pm Sep 21, 2006 12:08pm
Quoting Yoda_Glenn
Thanks for the response.

On my MGDemo I see two margin columns. One says "Usable Margin," and the other one one says "Req Margin." Which margin should I pay attention to, or which margin should not hit 0, in order for me to avoid a margin call?

Also, if there is a margin call, does this mean that the broker takes away the cash that was used in the trade, or any cash within the account in general?
MG Demo? Sorry, not familiar with the demo platform.

I assume usable margin should be above zero. I would assume required margin is constant.

You will always be guaranteed that you will get your EQUITY as your final balance. You will probably notice that your EQUITY column is higher than your Usable Margin (probably by the difference between your required margin - I would assume).

I don't have "required margin" on my application, so I have no idea what function that serves.
  • #6
  • Sep 21, 2006 12:12pm Sep 21, 2006 12:12pm
Quoting mkkr
IBFX, actually allows you to go negative. e.g. you have mini account
you have a balance of $550.00 you buy one standard lot GPB/USD with spread of 3 pips you now have $20.00 margin left, they will allow you to get negative $270.00 which leaves $250.00 equity.. I trade the news with mini account becasue of leverage and no stops bad thing about IBFX is they allow max buy of 50 mini's 5 standard lots at a time
IBFX is probably the exception to the rule, although I know that MIG Financial also allows you to go into "negative margin" during the weekdays only. On Friday at 4:30pm EST, if you're in negative margin (but not negative equity), they'll liquidate your position (margin call).

Sucks about IBFX though on their mini accounts, I could see the need to mix and match mini and standard size orders above 5 standard lots (50 mini lots). But, whatever.
  • #7
  • Sep 21, 2006 12:30pm Sep 21, 2006 12:30pm
Your understanding of a margin call is "off" if u believe that a margin call is used as a stop loss.
Quoting Yoda_Glenn
If I have an account with 1000$ in it, and a 100:1 margin, how far in the negative would my position have to move against me for my broker to enact a margin call against me? Or is my understanding of the margin call "off" somehow? Thanks.
In trading, there is no bullshit. You either make money or you don't.
  • #8
  • Sep 21, 2006 12:34pm Sep 21, 2006 12:34pm
Quoting mrgreen
Your understanding of a margin call is "off" if u believe that a margin call is used as a stop loss.
For longer term positions, especially carry trades and multi-account hedging, I think it's extremely useful information to know.
  • #9
  • Sep 21, 2006 12:42pm Sep 21, 2006 12:42pm
My answer was in context to the question being asked. W/a 1K acct at 100:1 leverage I do not believe this is a situation as u describe. I do agree in your described situations that knowing where the margin call will be triggered is very usefull and a neccessity.
Quoting mrmikal
For longer term positions, especially carry trades and multi-account hedging, I think it's extremely useful information to know.
In trading, there is no bullshit. You either make money or you don't.
  • #10
  • Sep 21, 2006 1:13pm Sep 21, 2006 1:13pm
Quoting Yoda_Glenn
If I have an account with 1000$ in it, and a 100:1 margin, how far in the negative would my position have to move against me for my broker to enact a margin call against me? Or is my understanding of the margin call "off" somehow? Thanks.

Mmmmm...I am probably wrong, so please correct me, but I think that they would issue a margin call as soon as your total account loses more than
$2,500, which is 50% of your account balance.

Is that correct ? That's what I understand when most brokers say they will issue a margin call as soon as your total account suffers more than a 50% loss as a result of that one trade.....therefore as soon as it touches -51%, you are out.

Also, regarding whether or not the broker actually takes your $1000 in order for you to make that 1 lot trade (100K), my understanding is that no, they just "hold" it as a collateral (which makes little difference anyways I guess 'cause it's still at risk).

Therefore, imagining that all I've said so far is correct, the true "benefit" (and huge risk !!!!) of trading with anything higher than a 100:1 leverage, is that you can purchase more lots, since instead of having the "hold" on $1000 (and therefore having available $4000 left in the account), you can limit the hold to up to just $250 (using 400:1) and therefore use more lots (that now only "cost" you 250 each).

Also, ALWAYS considering all I've said is correct, with a 100:1 leverage and a $5000 account techically you can trade at THE MOST (not that it is advised) 2 lots and a half at the same time ($2500), since you need AT LEAST the exact same amount of your open position untouched sitting in your account, as it serves as a collateral for your trades.

Ok, now it is your turn to let me know if I got it all wrong or if it makes sense.......please be honest because I want to make sure I got it right

MrFuture
"Lunch ? Lunch Is For Wimps !"
  • #11
  • Sep 21, 2006 3:37pm Sep 21, 2006 3:37pm
Quoting MrFuture
Mmmmm...I am probably wrong, so please correct me, but I think that they would issue a margin call as soon as your total account loses more than
$2,500, which is 50% of your account balance.

Is that correct ? That's what I understand when most brokers say they will issue a margin call as soon as your total account suffers more than a 50% loss as a result of that one trade.....therefore as soon as it touches -51%, you are out.

Also, regarding whether or not the broker actually takes your $1000 in order for you to make that 1 lot trade (100K), my understanding is that no, they just "hold" it as a collateral (which makes little difference anyways I guess 'cause it's still at risk).

Therefore, imagining that all I've said so far is correct, the true "benefit" (and huge risk !!!!) of trading with anything higher than a 100:1 leverage, is that you can purchase more lots, since instead of having the "hold" on $1000 (and therefore having available $4000 left in the account), you can limit the hold to up to just $250 (using 400:1) and therefore use more lots (that now only "cost" you 250 each).

Also, ALWAYS considering all I've said is correct, with a 100:1 leverage and a $5000 account techically you can trade at THE MOST (not that it is advised) 2 lots and a half at the same time ($2500), since you need AT LEAST the exact same amount of your open position untouched sitting in your account, as it serves as a collateral for your trades.

Ok, now it is your turn to let me know if I got it all wrong or if it makes sense.......please be honest because I want to make sure I got it right

MrFuture
So in essence your position can not move against you to the point where it equals 50% of your TOTAL funds in the Forex account, right? (Sorry to answer your question with a question.)
Binary Options Trader
  • #12
  • Sep 21, 2006 4:09pm Sep 21, 2006 4:09pm
MrMikals post 2 on this thread seems pretty clear. To put it simply:

If your account equity drops below the amount needed to maintain the trade a margin call is triggered. In the post 2 example of the $100 equity to maintain a 10K trade. Once your acct reaches 99.00 dollars your margin call is triggered because u cannot maintain a 10K trade w/ $99.
Your trade is closed, the broker pockets your $901 and you have $99 left to trade with.
In trading, there is no bullshit. You either make money or you don't.
  • #13
  • Sep 21, 2006 6:52pm Sep 21, 2006 6:52pm
Quoting mrgreen
MrMikals post 2 on this thread seems pretty clear. To put it simply:

If your account equity drops below the amount needed to maintain the trade a margin call is triggered. In the post 2 example of the $100 equity to maintain a 10K trade. Once your acct reaches 99.00 dollars your margin call is triggered because u cannot maintain a 10K trade w/ $99.
Your trade is closed, the broker pockets your $901 and you have $99 left to trade with.
This is confusing now, because MrMikals did not actually say what you are saying. He is saying that as soon as your Margin Level reaches 0, you get the call....while you are saying that as soon as it reaches $99 you get the call.

So...where's the truth ?

Thanks

Future
"Lunch ? Lunch Is For Wimps !"
  • #14
  • Sep 21, 2006 7:05pm Sep 21, 2006 7:05pm
Ok, and what about what Interbank FX is saying:

"Interbank reserves the right to liquidate any open position should a client's initial margin drop in value by 50% based on the value of any open positions"


What does it mean exactly ? In a $5000 standard account scenario, with 100:1 leverage, where I would use $1000 to buy one lot (100K), what would this mean ?

a) that they will liquidate my position as soon as my $1000 turns into $500 (therefore losing more than 50%), or

b) they will liquidate my position as soon as my ENTIRE account ($5000) will lose 50%, therefore 2500 ???????

I don't get this part and I keep getting different answers....

Thanks

Future
"Lunch ? Lunch Is For Wimps !"
  • #15
  • Sep 21, 2006 9:59pm Sep 21, 2006 9:59pm
Quoting MrFuture
Ok, and what about what Interbank FX is saying:

"Interbank reserves the right to liquidate any open position should a client's initial margin drop in value by 50% based on the value of any open positions"


What does it mean exactly ? In a $5000 standard account scenario, with 100:1 leverage, where I would use $1000 to buy one lot (100K), what would this mean ?

a) that they will liquidate my position as soon as my $1000 turns into $500 (therefore losing more than 50%), or

b) they will liquidate my position as soon as my ENTIRE account ($5000) will lose 50%, therefore 2500 ???????

I don't get this part and I keep getting different answers....

Thanks

Future
Future, I think the reason you are getting different answers is because the truth is different depending on your broker. Apparently IBFX liquidates at a 50% loss...which personally, I think is ludicrous...but they are more exposed than I am, so there you go.

All I know is based on my personal experience with different brokers...and truthfully, it WAS different. Some let me go into negative margin and some stopped me at a certain percentage. For the most part...most brokers stopped me out when i hit that magic number...margin balance hitting 0.

Can't say about IBFX because I never tried to get stopped out with a margin call.
  • #16
  • Sep 22, 2006 6:41am Sep 22, 2006 6:41am
Quoting mrmikal
Future, I think the reason you are getting different answers is because the truth is different depending on your broker. Apparently IBFX liquidates at a 50% loss...which personally, I think is ludicrous...but they are more exposed than I am, so there you go.

All I know is based on my personal experience with different brokers...and truthfully, it WAS different. Some let me go into negative margin and some stopped me at a certain percentage. For the most part...most brokers stopped me out when i hit that magic number...margin balance hitting 0.

Can't say about IBFX because I never tried to get stopped out with a margin call.
Ok, thanks.....but I am still trying to understand: that 50% loss is for the open trade (1000 turns into 500), or is it for the entire account (5000 turns into 2500) before IBFX closes your position ?

Thanks
"Lunch ? Lunch Is For Wimps !"
  • #17
  • Sep 22, 2006 7:15am Sep 22, 2006 7:15am
Actually he said "Margin Balance" Emphasis on the word balance. When the trade in post 2 was put on the broker took 100 from your 1000 and put it in reserve. the rest of your acct - the 900 is now called "Margin Balance". Once your Margin Balance reaches 0 your out.
This is a hard subject to wrap your mind around I know, but it is important. Perhaps some google searches on key terms would help. Look up the word Margin Balance, Margin Call, and see what they mean in technical financial terms.

Quoting MrFuture
This is confusing now, because MrMikals did not actually say what you are saying. He is saying that as soon as your Margin Level reaches 0, you get the call....while you are saying that as soon as it reaches $99 you get the call.

So...where's the truth ?

Thanks

Future
In trading, there is no bullshit. You either make money or you don't.
  • #18
  • Sep 22, 2006 7:45am Sep 22, 2006 7:45am
Quoting mrgreen
Actually he said "Margin Balance" Emphasis on the word balance. When the trade in post 2 was put on the broker took 100 from your 1000 and put it in reserve. the rest of your acct - the 900 is now called "Margin Balance". Once your Margin Balance reaches 0 your out.
This is a hard subject to wrap your mind around I know, but it is important. Perhaps some google searches on key terms would help. Look up the word Margin Balance, Margin Call, and see what they mean in technical financial terms.
Incidentally, I had a conversation with 4 brokers this morning. 3 of them agreed with the assessment, but used different terms.

FX Solutions calls the Margin Balance "Usable Margin" and actually point blank said that when Usable Margin falls to zero, you get a margin call. As an example, the guy started off with $1000 with 400:1 leverage. He said, if you bought 1 standard lot of the USD/JPY, your Usable Margin would immediately fall to $750. Once your LOSS = -$750...you're done. So in the end, if you wanted to liquidate the account after the margin call, you'd get a spiffy $250 check.

The other 2 brokers said basically the same thing, but used a different term, Margin Level. The example was the same $1000 at 200:1 leverage. If you buy 1 standard lot your margin level drops to 200% ($500 for required margin means your account balance of $1000 is 200% of the required margin). They said a margin call occurs when your margin level drops below 100%. Thus if you lost $501, your account balance would $499 which is less than 100% of the required $500 margin. So in essence, the same thing.

A fourth broker actually had fluctuating requirements. Basically on the weekdays, you had to maintain 1% (of the trade size) and on the weekends (close of Friday) you had to maintain 2%. This means that with $2000, if you traded 1 standard lot of the USD/JPY...you have to maintain an equity level ABOVE $1000 during the weekdays. On the weekends, you better have $2000 in equity or else you get called on Friday at close.

SO...there you have it...3 out of 4 brokers agree!
  • #19
  • Sep 22, 2006 7:51am Sep 22, 2006 7:51am
IBFX does the margin call when your EQUITY reaches 50% Not your margin balance. which means you lose more money. (believe it or not I like it that way)
Quoting mrmikal
Future, I think the reason you are getting different answers is because the truth is different depending on your broker. Apparently IBFX liquidates at a 50% loss...which personally, I think is ludicrous...but they are more exposed than I am, so there you go.

All I know is based on my personal experience with different brokers...and truthfully, it WAS different. Some let me go into negative margin and some stopped me at a certain percentage. For the most part...most brokers stopped me out when i hit that magic number...margin balance hitting 0.

Can't say about IBFX because I never tried to get stopped out with a margin call.
THE MAN
  • #20
  • Sep 22, 2006 7:55am Sep 22, 2006 7:55am
IBFX, actually allows you to go negative. e.g. you have mini account
you have a balance of $550.00 you buy one standard lot GPB/USD with spread of 3 pips you now have $20.00 margin left, they will allow you to get negative $270.00 which leaves $250.00 equity.. I trade the news with mini account becasue of leverage and no stops bad thing about IBFX is they allow max buy of 50 mini's 5 standard lots at a time
Quote:
<TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Originally Posted by mrmikal
Depends on your trade size.

Let's say you trade 1 mini of currency/pair XXX/USD that has a rate of 1.000 (for simplicity). That means you spend approximately $100 for 100,000 XXX.

Your margin balance is now $900 (USD). Because you are pair XXX/USD is XXX-based, your per pip P/L will be $1 (USD).

You could effectively withstand 900 pips...

The key is your MARGIN BALANCE cannot hit 0...or you will get a margin call.

This task becomes slightly more complicated if your trading pairs USD/XYZ (USD based) because the per pip P/L will fluctuate as USD/XYZ moves up and down.

Just watch your MARGIN BALANCE and make sure it stays above 0.
</TD></TR></TBODY></TABLE>

<!-- / message --><!-- sig -->__________________

Quoting mrmikal
Future, I think the reason you are getting different answers is because the truth is different depending on your broker. Apparently IBFX liquidates at a 50% loss...which personally, I think is ludicrous...but they are more exposed than I am, so there you go.

All I know is based on my personal experience with different brokers...and truthfully, it WAS different. Some let me go into negative margin and some stopped me at a certain percentage. For the most part...most brokers stopped me out when i hit that magic number...margin balance hitting 0.

Can't say about IBFX because I never tried to get stopped out with a margin call.
THE MAN
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