Now it’s time for us to try to make an example trading scenario with a margin call level 100% without a separate stop out level.
Different forex and CFD brokers have different policies regarding margin call and stop out levels.
Some use margin call level 100% without stop out level and others use a 100% margin call and separate stop out levels.
Well, we will start discussing brokers who only use a 100% margin call policy without a separate stop out.
What will happen if our trading facing a bad condition where the margin level has reached 100%?
Let’s check it out
TenkoFX is a forex and CFD broker with experience since 2012, providing services to all traders from several countries.
Margin calls and stops out levels depend on the selected account type, you can read it on the account trading page
First step: deposit funds to account trading
For example, you make a deposit to a trading account of $1000, so your total balance is $ 1000.
You will see your account condition before open any new position as below.
The second step is calculating the Required Margin
In this example, you said you would buy EUR / USD 1.15000 with a position size of 1 mini lot or 10,000 units with a margin requirement of 2%.
Then we need to calculate the required margin using the following steps.
We know that EUR / USD which is the base currency is EUR, which in this case we buy 1 mini lot, which means the national value is 10,000 Euros.
If your trading account is denominated in USD then you need to convert euros to USD.
Here it is $ 1.15 = € 1 $ 11,500 = € 10,000
Then the national value will be $ 11,500
So by using the national value we can now calculate the required margin using the formula explained in the previous lesson.
Required Margin= Notional Value x Margin Requirement $ 230 = $ 11,500 x .02
From the calculation above, we get a figure for the required margin of $ 230
The third step is to calculate the used margin
In this example you only open one position, so to calculate the used margin is very easy because the required margin is the same as the used margin, then here for the used margin is $ 230.
But if you still open another position, then you must add all the required margins to get all the amount of used margin.
The number of units to open a position also affects the amount of used margin where the greater the unit position the greater the required margin which means used margin will greater also.
From the calculations outlined above, we get the following data:
- Account balance = $ 1000
- Required margin = $ 230
- Used margin = $ 230
The fourth step calculates equity
To calculate equity we need to look at unrealized profit/loss.
Assume it after you open a buy position on EUR / USD shortly afterward the price moves in the direction of the position and reaches a break-even or unrealized profit/loss = 0
To calculate the value of equity we use the formula outlined in the previous lesson as follows.
Equity value = Balance + Floating Profits/Losses $1,000 = $1,000 + $0
From the above calculation, we get the value of equity = $ 1000.
The fifth step is calculating free margin
To calculate the free margin, we use the formula outlined in the previous lesson as follows
Free Margin value = Equity - Used Margin $770 = $1,000 - $230
In the condition of unrealized profit/loss = 0 with a balance of $ 1000 we get the following data:
- Account balance = $1000
- Required margin = $ 230
- Used margin = $ 230
- Equity = $1000
- Free margin = $ 770
The sixth step calculates the margin level
To calculate the margin level, we use the formula as described in the previous lesson with the following steps:
Margin Level percentage = (Equity / Used Margin) x 100% 435% = ($1,000 / $230) x 100%
From the above calculation, we get a percentage level margin value of 435%
In the condition of unrealized profit/loss = 0, we will see the condition of the trading account will be like in the image below;
EUR / USD is falling down 500 pips
When trading accounts get unrealized profit/loss = 0, account conditions are still safe, margin levels are still quite high and can still be used to open new positions.
But for example, you have not decided to open a new position and then the price of EUR / USD drops by 500pips to 1.10000, the condition of your trading account will certainly be different.
The impact is margin used will also change, why does this happen? because the national value has changed, it is necessary to do a sum of the required margins.
Whenever the EUR/USD value changes the required margin also changes.
At present the price of EUR/USD is at 1.1000, if previously it was at 1.1500, then we will repeat the steps to determine the national value of EUR/USD.
Because trading accounts use USD denominations, we need to convert Euros to USD, in this case, the following:
$ 1.10 = € 1 $ 11,000 = € 10,000
We get a national value of $ 11,000, if previously at $ 11,500.
Because the EUR / USD pair is declining, it means that the euro currency is weakening, and because your denomination account is using USD, this causes the national value to change to decrease.
We will calculate the required margin again using the formula as before
Required Margin value = Notional Value x Margin Requirement $220 = $11,000 x .02
Because the national value has decreased, so has the required margin also decreased.
After doing the calculations we know that the required margin is $ 220.
This is certainly different when the price of EUR / USD at 1.1500 which requires a margin of $ 230, and when the price becomes 1.1000, we find the required margin to be $ 220.
We will see in our trading account that the value of used margin changes with price changes, which reflects changes in the required margin.
To calculate this floating profit/loss we use the ask price data with the current price data where in this example it is 1.15000 to 1.10000, which is 500 pips.
Because you are trading using mini lots, the value of 1pip = $ 1, thus your floating profit/loss is – $ 500.
If calculating using the formula will be like below;
Floating Profit/Loss = (Current Price - Entry Price) x 10,000 x $X/pip -$500 = (1.1000 - 1.15000) x 10,000 x $1/pip
Your equity now
And when you get a floating loss of $ 500 then your equity also only becomes $ 500, by recalculating using the previous formula.
Equity value= Account Balance + Floating Profit/Loss $500 = $1,000 + (-$500)
Your free margin now
Then for the free margin value is $ 280, using the formula as we did before.
Free Margin value = Equity - Used Margin $280 = $500 - $220
Your margin level now
Then for the current margin level, the percentage is 227%, using the formula as we did before.
Margin Level value = (Equity / Used Margin) x 100% 227% = ($500 / $220) x 100%
Even though it has a floating loss of 500 pips, the margin level is still above 100%, it is still good, although not expected.
Now the condition of your trading account has changed along with changes in the pair EUR/USD traded when the price drops 500 pips, as in the image below
When EUR/USD is down 228 pips again
You waited long enough to expect prices to return to floating profit, but instead, the opposite happened, prices continue to fall and are now at 1.07120.
So the total price drops in the EUR / USD pair from the ask price are 788 pips (1.15000-1.07120.)
Because of this change, we will re-calculate the used margin after the EUR / USD price falls to 1.07120.
As with the previous step, we will use the formula to calculate this used margin.
Because trading accounts use USD denominations we need to convert Euros to USD to get the national value.
$ 1.07120 = € 1 $ 10,712 = € 10,000
Now we know that the national value is $ 10,712.
Before getting the used margin value, we will do the calculation to get the required margin value
Required Margin value = Notional Value x Margin Requirement $214 = $10,712 x .02
Keep in mind that if the national value decreases, the required margin also changes.
With a margin requirement of 2%, when the EUR / USD price drops by 788 pips after performing the calculation steps we get a required margin of $ 214.
This value is different from the condition when the price of EUR / USD at 1.10000, where the required margin is 220 $.
Changes in the value of the used margin reflect changes in the required margin at each price change.
Because you only have one trading position, the used margin is the same as the required margin, different if you have several positions, the used margin will be different from the required margin.
To calculate this floating profit/loss we use the ask price data minus the current price, it will be 1.15000 to 1.07120 = 788 pips
Because you are trading using mini lots, the value of 1 pip = $ 1 so that your floating profit/loss is – $ 788
Floating Profit/Loss = (Current Price - Entry Price) x 10,000 x $X/pip -$788 = (1.07120 - 1.15000) x 10,000 x $1/pip
Your equity now
Then you calculate your current equity amount to only $ 212.
Same way to calculate it as we did before as follows
Equity value= Account Balance + Floating P/L $212 = $1,000 + (-$788)
Your free margin now
Furthermore, calculating the current free margin, using the formula as we have done before, the free margin data is obtained – $ 2 (minus $ 2)
Free Margin value = Equity - Used Margin -$2 = $212 - $214
Your margin level now
To calculate the margin level we use the formula as we have done before, as follows
Margin Level percentage= (Equity / Used Margin) x 100% 99% = ($212 / $214) x 100%
After calculating it turns out your margin level is below 100% which when the price drops by 788 pips your margin level becomes 99%.
Thus at this time, your margin level value is below the 100% margin call level.
Now your trading account condition will look like the image below.
Margin call 100%
Because the broker does not separate the stop out level then after the margin level drops 100% then your transaction will be forced to close by the broker and face two conditions:
- The used margin will be released.
- The floating loss that occurs will be realized.
Your balance value will be updated which reflects the realized loss that occurred.
After you face this condition your account will become flat, there are no active positions and Free Margin, Equity, and Balance will be the same.
There is no floating profit/loss because there are no open positions, and your trading account conditions will look like in the image below:
In the final condition you get a loss of 79% of your initial capital of $ 1000 and now there is only $ 212 left.
The way to calculate the gain/loss percentage is to use a formula like the one below
Gain/Loss percentage = ((Ending Balance - Starting Balance) / Starting Balance) x 100% -79% = (($212 - $1,000) / $1,000) x 100%
Getting trading account conditions to get automatic liquidation because the margin level is below the margin call level is painful.
And even some traders may experience depression because losing money, then forex trading is recommended using money that affords to lose.
At the broker’s policy with a 100% margin call without using a separate stop out level, is when the value of the margin level is below the threshold margin call level of 100%, then the broker will force close the trader’s position in a loss condition.
Then how about a trading scenario with broker policy using a 100% margin call and a separate stop out level?
We will discuss further, so keep following this site update, and if useful, please help to share.