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Locked (hedge) trade can face a Margin Call

  • #61
  • May 23, 2009 2:28am May 23, 2009 2:28am
Even if he managed to get his 8k Deposit to 25k because he got lucky. He
lost so much with his 11 Lots that he tried to hedge them another 11 Lots which left no free margin to trade. Now he tries to make some money on USD/JPY in the meantime. (He was going Long first when USD/JPY was dropping like a stone.)
Lossing even more money. Equity drops below 11k -> Kaboom.

As simple as that.
  • #62
  • Edited 3:06am May 23, 2009 2:39am | Edited 3:06am
Quoting Xaron
I still don't get it. You said you were full hedged so no margin call could occur. Ok.
Then you say that the market did walk in your favor and you could unlock those positions? How can the market walk in your favor if you are completely hedged? Your net asset value won't move a single cent no matter if the market goes up or down. That can only mean that you've added another long and in that case you are not full hedged anymore. Maybe that single added long just went some pips against you (as it usual does due to market noise) and then you got your...
In fact it is possible (but those trades do not show on the posted statement), as meanwhile the pair goes down he could be picking tops and sell to hedge in the retracements up and closing them thereafter with a profit (which goes to the balance but not so much to the equity) when it retraced back up again, and so on until the last ones that are shown... That is the only reason that I can figure out that would explain a loss almost 4 times bigger than the initial equity (which means the balance grew by that amount, but the subsequent hedges were done at a lower and lower price eating all those profits up.) If so, where are those profit trades? That would clarify the whole situation a lot (not that we can do much but at least understand what happened).

On the other hand, m88, while it is (theoretically) true that a floating loss is "not yet" lost, one should keep an eye both on the equity and (free margin which directly depends on it). What shows as Equity in the bottom line is the true amount available, instead the Balance shows all but it is not available unless you succeed at closing all the open losing trades at least at breakeven.
Balance minus floating P/L = real money available.

If the free margin starts becoming negative and you are not aware of it (as I explained before) - this with a value per pip of $110 can go down very fast - plus if you don't keep an eye on the Margin percentage ("Margin Level") and it goes below 100%, (which in fact is equivalent to 0% as when the Margin Level shows 100% and Free Margin starts showing as a negative number, it means that you only have the amount required by the margin left on the account), as soon as it will reach the limit set by the broker (be it 10% or 5% or whatever) they will close everything. It might even be triggered by a sudden change in spread or simply by swap charges, given the high amount of lots involved.
  • #63
  • May 23, 2009 2:53am May 23, 2009 2:53am
Thanks, this all makes sense. So FXCM did just the mistake to allow him borrowing more money than he should be able to borrow. The margin call was just wrong executed in that case he ended up with a negative balance. Now it seems to be very fair to me that they not even set it back to zero but to a positive value.
I know for Alpari UK I got a margin call (in a small 1k account) once and had only 44 cents left! Because they did not close all positions together but one after another till my account was at zero. That was an interesting experience.
  • #64
  • May 23, 2009 2:58am May 23, 2009 2:58am
v r drag far from main point.

can any 1 explain how a locked trade face a situation so call "margin call"/?

can a "margin call" locked order close on time with different 110 pips compare to market price?
  • #65
  • May 23, 2009 3:00am May 23, 2009 3:00am
i believe forex broker not allow his client to have -xx at the end of trading.due to this ERROR,my account end with -4k.how can this happen?
  • #66
  • May 23, 2009 3:05am May 23, 2009 3:05am
Quoting m88
due to this ERROR,my account end with -4k.how can this happen?
Actually this shall not happen. That's the reason they want to give you 11k back. Be glad that you don't have a reserve liability like in future markets...
  • #67
  • May 23, 2009 3:19am May 23, 2009 3:19am
Quoting m88
can any 1 explain how a locked trade face a situation so call "margin call"/?
The way I understand it now: With your account leverage of 200:1 and your locked loss you simply never should had been able to open so many lots. Maybe the system did some wrong calculations and got it afterwards as you tried to open (or close) another single position. You already exceeded your margin before and something triggered the mc. The result that you've been deeply in the red afterwards was FXCM's mistake and they want to give you that money back. The result that you've been margin called was simply your mistake and will happen again if you do such excessive overleveraging. An hedged loss is still a loss and can easily lead to a margin call as there is simply not enough free(!) margin left.
  • #68
  • May 23, 2009 3:26am May 23, 2009 3:26am
Quoting m88
v r drag far from main point.

can any 1 explain how a locked trade face a situation so call "margin call"/?

can a "margin call" locked order close on time with different 110 pips compare to market price?
If you are totally locked, the equity will only be going down by a momentaneous change in spread, or after the day close because of the swap difference, which is always negative. I do not know if your broker allows you to hedge when the margin level is below 100%, on mine they used to do so but now they only allow to hedge if the ML is above 100% and there's enough free margin to cover the difference in margin if the hedge price is higher than the original position (they require a single margin averaged between both buy and sell open prices - I would assume it is the case here as you could never sustain a full margin requirement on 22 (11+11) lots even with $25K). BTW: Does FXCM calculate the margin requirement proportionally to the price as it is usual in most brokerages, or is it a fixed amount (as for example at Marketiva) of $1000 per standard lot? In this case it would be possible but really really tight.

Maybe you were allowed to hedge way below 100% (and I don't know if your broker has variable spreads on MT4), the amount of days doesn't seem too much for it to have been caused by the swap though.
If you were above or near 100% all the time, you would have needed a spread change of about 60 pips to trigger the margin call at 10% (provided the margin requirement is proportional to price).
  • #69
  • May 23, 2009 3:28am May 23, 2009 3:28am
Quoting Xaron
The way I understand it now: With your account leverage of 200:1 and your locked loss you simply never should had been able to open so many lots. Maybe the system did some wrong calculations and got it afterwards as you tried to open (or close) another single position. You already exceeded your margin before and something triggered the mc. The result that you've been deeply in the red afterwards was FXCM's mistake and they want to give you that money back. The result that you've been margin called was simply your mistake and will happen again if...
i think my margin atleast 400% when i locked. and i still able to open 6 lot position.
  • #70
  • May 23, 2009 3:29am May 23, 2009 3:29am
Quoting doblece
If you are totally locked, the equity will only be going down by a momentaneous change in spread, or after the day close because of the swap difference, which is always negative. I do not know if your broker allows you to hedge when the margin level is below 100%, on mine they used to do so but now they only allow to hedge if the ML is above 100% and there's enough free margin to cover the difference in margin if the hedge price is higher than the original position (they require a single margin averaged between both buy and sell open prices - I...
i think my margin atleast 400% when i locked. and i still able to open 6 lot position.
  • #71
  • May 23, 2009 3:32am May 23, 2009 3:32am
... and here's a clue directly from FXCM's site:

http://www.fxcm.com/execution-risks.jsp

Quote
Hedging ... A margin call may occur even when an account is fully hedged...
for all the reasons they explain much better than me in the above link.

Quod erat demonstrandum.
  • #72
  • May 23, 2009 3:34am May 23, 2009 3:34am
Quoting m88
i believe forex broker not allow his client to have -xx at the end of trading.due to this ERROR,my account end with -4k.how can this happen?
Did you read FXCM General Terms of Business?
They lined out clearly that you can get margin called when you are fully hedged.

http://www.fxcm.com/execution-risks.jsp

"
Diminishing Margin
A margin call may occur even when an account is fully hedged, since spreads may widen, causing the remaining margin in the account to diminish. Should the remaining margin be insufficient to maintain any open positions, the account may sustain a margin call, closing out any open positions in the account. Although maintaining a long and short position may give the trader the impression that his exposure to the market's movement is limited, if insufficient available margin exists and spreads widen for any period of time, it may certainly result in a margin call on all positions.

Rollover Costs
Rollover is the simultaneous closing and opening of a position at a particular point during the day in order to avoid the settlement and delivery of the purchased currency. This term also refers to the interest either charged or applied to a trader's account for positions held "overnight," meaning after 5 pm (EST) on FXCM's Trading Station. The time at which positions are closed and reopened, and the rollover fee is debited or credited, is commonly referred to as Trade Roll Over (TRO). It is important to note that rollover charges will be higher than rollover accruals. When all positions are hedged in an account, although the overall net position may be flat, the account can still sustain losses due to the spread that occurs at the time rollover occurs.

Exchange Rate Fluctuations (Pip Costs)
Exchange rate fluctuations, or "Pip Costs," are defined as the value given to a pip movement for a particular currency pair. This cost is the currency amount that will be gained or lost with each pip movement of the currency pair's rate and will be denominated in the currency denomination of the account in which the pair is being traded. On the FX Trading Station, the pip cost for all currency pairs can be found by selecting "View," followed by "Dealing Views," and then by clicking "Simple Rates" to apply the checkmark next to it. If "Simple Rates" already has a check mark next to it, viewing the dealing rates in the simple view is as easy as clicking the "Simple Dealing Rates" tab in the dealing rates window. Once visible, the simple rates view will display the Pip Cost on the right-hand side of the window.

When a trader's position is hedged against exchange-rate risk, it is still exposed to exchange-rate volatility if the counter currency of the pair being hedged differs from the denomination of the account.

For example, if you are both long and short 10K USD/CAD with 500 pips in gross P/L, one can assume the spread will remain constant. Keep in mind that P/L is in terms of the counter currency, thus the losses are 500 CAD and are converted at the spot rate. If the hedge goes on at 1.1000, the GROSS P/L is 500/1.10 = 454.54 USD.

If the rates decrease to 1.0300, the same 500 pips of locked-in loss is now worth 500/1.03 = 485.43 USD, 30 USD more on only a 10K hedge. Though slight for this example, this is multiplied as hedged volume increases; consequently, it can create circumstances that may drain existing margin.

This can be very important for clients who have very large, hedged JPY positions: if the USD/JPY falls 1000+ pips, it can (depending on leverage, of course) have a severe impact on the gross P/L of any hedged JPY positions.
"

Getting a negative Balance is also not ruled out. This has been discussed on this forum a thousand times. Especially when you recklessly max out your margin this can happen.

You should ALWAYS READ THE RULES. Don't complain afterwards just because you were to lazy to read the Trading Agreement.
  • #73
  • Edited 4:08am May 23, 2009 3:41am | Edited 4:08am
Quoting m88
i think my margin atleast 400% when i locked. and i still able to open 6 lot position.
Does that mean that you opened a single 6 lot position to work with meanwhile all others were locked? or are you referring to the 6 shorts that show on the statement?

Can you clarify if you were hedging/unhedging (or working with a single position outside of the hedge building up equity) all the way down, and if so, why don't the trades appear on the statement? or did you simply order them by P/L so they are above the image?
  • #74
  • May 23, 2009 3:51am May 23, 2009 3:51am
Quoting doblece
Does that mean that you opened a single 6 lot position to work with meanwhile all others were locked? or are you referring to the 6 shorts that show on the statement?

Can you clarify if you were hedging/unhedging (or working with a single position outside of the hedge building up equity) all the way down, and if so, why don't the trades appear on the statement? or did you simply order them by P/L so they are below the image?
Ok. He locked in a huge loss. Now he opens another 6 Lots. Boom there goes
3000 USD of margin.
  • #75
  • May 23, 2009 4:03am May 23, 2009 4:03am
Quoting m88
i think my margin atleast 400% when i locked. and i still able to open 6 lot position.
With 11000 margin required (rounded) your equity would have to be at 44000 (Margin level = equity / margin * 100) for a margin level of 400%. Wasn't that "$400 free margin left" instead?
  • #76
  • May 23, 2009 4:33am May 23, 2009 4:33am
Hey m88
Attached Image (click to enlarge)
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  • #77
  • May 23, 2009 6:01am May 23, 2009 6:01am
This is still just another hypothesis.

The only thing that I can figure out is that you already had earned the additional $15K prior to opening the longs on day 13. That would explain why you were able to open 10 eu lots within a roughly two hours time span and leaves you with:

23072.25 - 7330.17 = 15742.08 equity and 214% margin level

That's roughly 140 pips plus spread that can go against.

Price went 40 pips lower than the hedging price taken later on. Which is about 200 total pips x 110 = 22000
Equity = 1000 (23000-22000)
Margin level = 13% (very tight and near 10% critical level)

Goes back the 40+pips and you recover 4400 equity (eurusd) plus 1000 makes 5000 equity. You hedge. Margin level = about 70% (still below 0, no free margin. Maybe the fluctuation of UJ allowed for a tight entry (will check that later on) at a particular moment, or simply they allow hedging under 100% or at least 90%...

Remember that every pip that moves represents $110 plus or minus of equity; a simple small retracement of, say, 15 pips globally, is already nearly 25% of margin...

Price then after hedging goes down an extra 120-130 pips, you are locked but here is the possible issue as per what is defined in the above hedging document from FXCM. It would be complicated to calculate given the fact that I am working with rounded values, but as this seems to be very near the price at which they finally end closing the long positions. Almost 100 pips below the critical level attained previously, even hedged, a minimal change would do the trick (let's say 3,1% of equity to start triggering the MC, that's roughly USD 230 = roughly ONLY 2 PIPS !!! which can indeed very easily fluctuate in a sudden widening... or be absorbed with the rate change... so I would very much incline towards this possibility.

Maybe on the moment the system didn't react in front of a fast movement, but a price adjustment afterwards indicated that the 10% (or whatever percentage it is) line had been crossed. You just need it to be crossed by a very small fraction, like for example 0.0001%, for it to become 9.9999% thus margin called. Way much less than even one pip...

Now here I don't know if you did hedge all positions for the week-end, and closed in profit on sunday, rehedging later on when it was going up. Or if you left the 6 remaining lots unhedged until Tuesday. Many alternative scenarios could have happened.

There are some details about the entries taken which I would like to analyze later on as well, if you are interested, though it might be off-topic... just let me know. Got to catch some sleep by now.
  • #78
  • May 23, 2009 6:07am May 23, 2009 6:07am
Quoting Dopey
Hey m88
Nice one.
  • #79
  • May 23, 2009 8:46am May 23, 2009 8:46am
Quoting doblece
Does that mean that you opened a single 6 lot position to work with meanwhile all others were locked? or are you referring to the 6 shorts that show on the statement?

Can you clarify if you were hedging/unhedging (or working with a single position outside of the hedge building up equity) all the way down, and if so, why don't the trades appear on the statement? or did you simply order them by P/L so they are above the image?
6 lot after locked.
  • #80
  • May 23, 2009 8:49am May 23, 2009 8:49am
Quoting doblece
With 11000 margin required (rounded) your equity would have to be at 44000 (Margin level = equity / margin * 100) for a margin level of 400%. Wasn't that "$400 free margin left" instead?
i don't think if u left usd400 u able to hedge
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