Margin call explained

First of all, excuse my inexperience, but I had a question with the math on the margin call explained portion in pipsology found on Forex Margin Call Explained
So, in the margin call, it claims that if you have 10,000 in your account balance, and you decide to purchase 80 lots, or $8,000,000 (1 lot=100k), assuming a broker gave a 100:1 wouldn’t you need more than 10k to even make that deal in the first place? or is it the assumption in this example that the broker is giving a 1000:1 margin?

another example: say I have a mini account of $2000 with a 50:1 margin. I decide to invest 50K, with $4.19 per pip with a usd Mr. of $1,800. so according to the same math, once I hit -47.7 pips, then I would hit a margin call? (since $200 is left, and $200/($4.19 per pip)=47.7 pips)

Thanks for the clarification guys!

No need to apologize for inexperience. Not on this forum.

The School lesson used loose terminology. They should have said that the trader bought 80 mini-lots. Apparently, since the example is based on a mini account, and presumably that means that positions consist of whole-numbers of mini-lots, the writers of the School lesson assumed that you would know that when they say “lots” in this example, they mean “mini-lots”.

So, the arithmetic looks like this:

80 mini-lots x $10,000 notional value per mini-lot = $800,000 notional value of this position.

Required margin on this position = 1% of $800,000 = $8,000.

Your terminology is not precise, but I think I know what you mean.

Your account has 50:1 maximum allowable leverage, which corresponds to 2% required margin on each position. You want to open a position with a notional value of $50,000. (Based on the $4.19 pip-value you quoted, I’m guessing this is a USD/JPY position.)

First, initial margin on this position will be $1,000 (that is, 2% of $50,000), not $1,800 as you stated.

Using the same calculation method as the School lesson, we ignore the cost of the spread, and we assume that you can draw your account down by the full amount of your “unused margin” (which initially is $1,000). Using these assumptions, a loss of 238 pips would wipe out your “unused margin”.

Not all brokers allow you to draw your unused margin down to zero, before hitting you with a margin call. Read your broker’s Terms and Conditions carefully (or call him up and ask) to be sure you know exactly how your particular account will handle margin calls.

Better yet, use money management techniques that keep you well away from margin-call territory.

Thanks for the reply, I guess I should have added that it was for an investment on my demo for EUR/USD at the rate of 1.2… something, the 1800 was what it required for a usd mrg in that particular case, but using the same exact parameters as the example my math is the same is yours. Thanks for the clarification! I say know your limits so you don’t sink your boat!

Sorry, but this isn’t making sense to me.

If you enter a [B]50,000-unit position in EUR/USD[/B] at 1.2159 (the current price) in an account with 50:1 broker leverage, the required margin will be $1,215.90 (that’s 2% of $60,795, the notional value of your position) — not $1,800 as you stated.

Also, the pip-value on this position will be $5.00 per pip, not $4.19 as you stated.

I see what I did, so EUR/USD, at 1.2157, order 65k, at a price of 6.50 per pip, with a usd mrg of 1,820.00, then by the math, $180 available, (180/6.50)=27.69 pip, so if I were to bet a majority of the farm (total account of 2000), then once I was -27.69 pips, I would have a margin call, right? Using the trading station on fxcm.

[B]Check the symbol for the pair you are trading.

I believe you are about to enter a position in GBP/JPY.[/B]

That’s the only pair that will display the numbers you are posting here.

FXCM requires APPROXIMATELY 2% margin. They lock their required margin amounts (in round numbers) around narrow currency-pair price-bands. In other words, as long as the price of GBP/JPY doesn’t stray too far from where it is right now, the required margin ($36 per 1,000 units of base currency) will not fluctuate with price.

Required margin = $36 per 1,000 units x 50 = $1,800 for 50,000 units of [B]GBP/JPY[/B].

And the pip value for 50,000 units of [B]GBP/JPY[/B] (or any other yen-pair) is (currently) $4.18

Yah, i saw what I did there earlier, I edited my statement at 1230, was that about right?

One of the many cool things about forex trading is that you can easily trade pretty much forever without a margin call. Keep your stops wide enough and your positions small enough to stay alive forever.

Just use PSILOCYBIN.

Man, you keep changing the numbers.

50K has become 65K. $4.19/pip has become $6.50/pip. And $1,800 required margin has become $1,820.

If I sound a bit confused, I think you can probably understand why.

Based on your [I][U]latest[/U][/I] numbers, your math is correct [I][U]in theory[/U][/I].

However, FXCM has a very complicated protocol for triggering margin-calls. To see how complicated, read this document — Margin & Leverage - FXCM Support.

Specifically, read the entire section titled [I]Smart Margin Watcher.[/I]

Yah, I understood why it was confusing, which is why I corrected the numbers, just wanted to make sure the formula I was using was the right one, because values are irrelevant if you have the right equation, just a different variable. Anyways, geeze, sounds like using a margin is very complicated, seems easy on face, but theres a lot of stipulations…

Thanks for the help though! much appreciated

Like a lot of Forex number crunching, while its nice to know how its arrived at, you dont need to be able to do the sums yourself, your broker will probably show it on the trading platform