Margin/Margin calls based on equity?

I have read everywhere that margin and margin calls are based on account equity rather than balance. So i have 2 questions:
1) your account balance is $500. you buy and sell 1 lot eur/usd i.e you are hedged. Your equity will not fluctuate now as a 1 pip loss on one trade is a 1 pip gain on the other. Now the EurUsd rises 500 pips. The buy trade is in profit by 500 pips, the sell trade in loss by 500 pips. The equity is still the same. However, the sell trade is in a loss by $5000, an amount that exceeds the initial account balance. Obviously you can't be in negative balance, but the broker shouldn't issue a margin call as equity is not low due to the other trade? What am i missing?
2) lets say your account balance is $1000 and you open a buy position and it goes into profit by $1000. Even though you have not liquidated your position, could you now open another buy trade for $1000? Because the Equity has increased even though balance has not.
Dek

Margin call & stop out depends on equity .
Balance does not, can be negative if equity above your margin levels.

Is that true? I always read you aren't allowed to be in negative balance but do brokers really allow it if your equity is high enough?
Dek

Your balance is what you have in your account after your last closed trade. Your equity is a function of your balance and the P/L of your open trade(s). Unless you have a credit arrangement with your broker you cannot have a negative balance since that would mean that you owe your broker money.

What you need to keep your eyes on though is your Usable Maintenance Margin which will show how much money you have available for initial margins for new trades and available money for covering losses on open positions. When that drops to zero your trades will be mercifully closed by your broker and you will be left with the margin that you have posted for your trades, unless the market has moved too fast and your losses has taken some out of that money too.

You should never get into that situation really. If you do then you haven't calculated your stop levels and your risk management system is not working very well. Your stops should take you out of any trade well before you get a margin call.

When you enter a trade you will post an initial margin. You will then see that your usable maintenance margin is reduced by the amount you posted as margin and the immediate minus in your P/L due to the spread. When your position reaches your entry level and your P/L = 0 your usable maintenance margin will be equal to your balance minus the initial margin you posted to be able to enter the trade in the case you have one new trade. This kind of trading when you use leverage is also known as trading on margin which simply means that you can control a larger sum than you might have on your account and as a goodwill gesture you post a margin to be allowed to use that credit facility with your broker.

Hope this cleared up the confusion a bit!

I appreciate your help, however I understand all of this, i've been trading for years i just haven't run into this yet and i'm focusing on a new strategy where this may become important.
Usable margin is based on equity as far as im aware. Correct? Your equity rises as a current position increases in profit. Thus your usable margin also increases. Therefore you should be able to open a new trade from the equity gained from a current profitable position without liquidating it no?
Dek

Yes equity is as I said before a function of your balance and your P/L as is your useable margin.
Your usable margin is your balance plus your P/L minus initial margin, or your equity minus initial margin.
I.e.
Usable Margin = balance + P/L - initial margin or
Usable Margin = equity - initial margin.

It's the useable margin that you need to keep an eye on. It's correct though that if you are in profit that profit is calculated into your useable margin as demonstrated above. If you use the equity then you need to deduct the initial margin which in fact gives you the useable margin.