Leverage the Killer

[flickabix]

Hello,

On page 3 of your lesson Leverage the Killer, you define a Margin Call as

"If the equity in the account drops below your usable margin, a margin call will occur and some or all open positions will be closed by the dealing desk at the market price."

Don't you mean Used?

greetings,

[In2Blues]

Originally Posted by flickabix

Hello,

On page 3 of your lesson Leverage the Killer, you define a Margin Call as

"If the equity in the account drops below your usable margin, a margin call will occur and some or all open positions will be closed by the dealing desk at the market price."

Don't you mean Used?

greetings,

No, they mean usable.

Usable margin is the amount of money left in your account that can be used if the trade goes against you. That way, you don't really get a margin call because you still have money in your account that can be used to cover the loss.

If you don't have enough money in your account to cover the loss when the trade goes against you, then you get a margin call and your position is liquidated immediately.

That's why good money management and Stop Losses are important.

[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.

[rhodytrader]

I understand what you're saying. It would make more sense if it said something like "below required margin".

[In2Blues]

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.

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.

[flickabix]

Thanks to both of you!

[dpaterso]

Hey - I just read this thread - and I've come up with a 'radical' idea!!!

If you get margin called your positions are closed (at a loss of course) BUT the amount used for the positions is returned to you not so???

So - instead of using stops you margin 99.99% of your account at any one time. If the trade goes in your favour - WOW - if not - you get margin called instead of being stopped out!!!

[rhodytrader]

Originally Posted by dpaterso

If you get margin called your positions are closed (at a loss of course) BUT the amount used for the positions is returned to you not so???

No. You get back the maintenance margin (generally about half your original margin), not your original.

[dpaterso]

I actually was not sure if my 'idiotic idea' would even get a response let alone from you John BUT now that you have posted something on the subject this is what happens with me at GCI anyway (and as you know I've been margin called several 'majestic' times in my life):

Let's say that I had $5000 in my account and I used $4900 on a position. If the position goes against me and I get margin called the $4900 LESS whatever the loss on the position is will be what I have left to trade with after the margin call (like I said - seen it happen more than once)!!!

At Delta on the other hand you cannot let your free margin percentage drop to below 30%. If it does they will try to contact you to inform you to close come positions and if they can't get a hold of you then they close the positions for you automatically so this 'strategy' would not work there for the simple reason that you are really risking the loss plus a possible 30% of your margin (if they let it 'slide' to 0%).

See the difference between the brokers?

Now - it's not to say I'd take the chance of trading like this because - at GCI - all they'd probably do is not actually execute the margin call (it's just an order) UNTIL the loss was big enough for them to be able to take a substantial 'bite' out of your account before actually executing the margin call. On the other hand - if the margin call was 'automatic' i.e. the system immediately closed out your position - well - then this 'strategy' would have had merit wouldn't you say???

[dpaterso]

Actually John - this kept me awake until the 'wee' hours this morning. Maybe it's not such 'ridiculous' idea after all.

Let me put it this way (OK - it's not the same as relying on a margin call to get stopped out BUT it did get me to thinking):

Let's say that you had $5000 in your account. The 'rules' state that you should not risk more than 1% - 2% of your account balance on any single trade (and this is where some people 'get it wrong' - myself included - a while back anyway) i.e. if the trade goes against you then (based on 2% let's say) you would only lose $100 (assuming that you have 'laid out' or used the entire $5000 to purchase an instrument). This IS NOT the same as only USING 1% or 2% of your capital to trade with i.e. on a $5000 account you would only be trading with $100 (2% for example) at any given time and believe you me you would take a lifetime and then some to make even a reasonable profit. I know this is 'old hat' to you but I do know for a fact that there are still people out there who don't 'get this right'!!!

Anwyay - I digress.

Back to the 'ridiculous' idea:

Let's say that you had $5000. Instead of buying say one lot of EUR/USD for example for $50 and setting your stop so that the most you would lose (2% rule) would be $100 which would mean that EUR/USD would have to move 100 pips against you before getting stopped out (I'm using my GCI account as an example i.e. $50 per lot mimum and 200:1 leverage) you 'adjust' the lot size to the point where you are using the maximum capital available to you on the trade and, after taking into account your 2% 'risk rule' you place a stop that will close the trade within a few points of a margin call. I dont' know if that makes sense. What I'm trying to get at is that there is no reason to NOT margin as much of your account as you can on a trade just as long as your 2% 'risk rule' (or 5% which is probably more what I have come to 'stick with') is met. In other words - using the above figures as an example - let's say that you opened a position with $2500 EUR/USD but you're only prepared to lose 5% if the trade goes against you. Your potential loss is therefore $250 BUT you have now used $2500 for the lot so what this means is that EUR/USD has 'room to move' of 5 pips before getting stopped out but you have used 50% of your capital on this trade. In other words by varying the lot size as a ratio to the amount of capital being 'laid out' you are then effectively altering the number of pips that the trade can go against you BUT the potential profits are enormous if it goes in your favour.

Actually - now that I'm typing this and reading it back - it's starting to NOT make sense to me - but I'm leaving it here - I'll come back to it - I know there is something there (here) - I'm just not being able to put it correctly into words right now.