Quote:
Originally Posted by flickabix
So, thanks for that In2blues, and I understand all you're saying, but if, as you say
"Usable margin is the amount of money left in your account that can be used if the trade goes against you" (and I'm not arguing with you here)
how can, as babypips claims, the equity in your account ever drop *below* the Usable Margin?
As I see it (as please please correct me if i'm wrong), if Equity = Used Margin + Usable Margin, that would mean that that you'd have to have a negative Used Margin for a margin call to be realised.
And even if this were theoretically possible this would never happen because a while back you would have already received your margin call because your equity would have dropped to the Used Margin.
Or am I being silly?
The next page explains for us that
( Equity =< Used Margin ) = MARGIN CALL
and this makes sense to me, not the previous statement.
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Yes, the statement (Equity =< Used Margin) = Margin Call makes more sense.
You're right that the Equity cannot drop below the Usable Margin.
Technically, a margin call would be initiated once the Usable Margin reached $0 but, in theory, it could go slightly negative depending on how quickly the market is moving. Either way, your positions would be liquidated at a loss.
Your Used Margin wouldn't go negative because that's the amount it cost you to get into your trade. That won't change, only the Usable Margin will.
In the Babypips example, you had $10,000 in Equity. It cost you $8,000 (Used Margin) to get into the trade, leaving you $2,000 of Usable Margin. Once your position went against you and that $2,000 of Usable Margin was gone, your position was liquidated. Your $8,000 didn't change because it was a one-time cost to get into the trade, but your Equity was now reduced by the $2,000 of Usable Margin that you lost in the trade.