Hi. Looking fwd to learning here. My trading platform advertises a 60% margin call.
Does that mean I get called when I lose 60% or when I lose 40% ?
Is that 60% with leverage or without ? For example if I risk $1000 actual dollars and use 50:1 leverage to buy $50,000 worth of currency and then that currency loses 60% ($30,000 leverage dollars or $600 real dollars) do i need to come up with $600 dollars or $30,000 ?
There are two margin amounts that you need to be aware of: initial margin, and
maintenance margin.
Initial margin is the portion of your account which is required by your broker as a “security deposit” when you open a position. This initial margin is calculated as a percentage of the notional value of your position ($50,000 in your example). If you have at least this amount (the initial margin) available in your account, then you can open this position.
Let’s say you have $2,000 in your account, and you have no open positions. The $50,000 position you want to open requires initial margin of $1,000 (which is 2% of $50,000, corresponding to the 50:1 leverage in your account).
You have more than the required initial margin, so you are able to open the $50,000 position in your example.
As soon as you open that position, your (100%) initial margin requirement changes to a (60%) maintenance margin requirement. This means that, in order to maintain your $50,000 position, you must have $600 (60% of the initial $1,000 margin) set aside. This amount is still in your account, and it will be released back to you after your position is closed. But, while your position is open, this $600 amount cannot be used for any purpose (for example, to cover losses, to open additional positions, or to be withdrawn).
So, if you let your losses run completely out of control, you can lose all of your money down to the $600 maintenance margin level. That is, in the example of a $2,000 account, you can lose (or withdraw) up to $1,400 without jeopardizing your $50,000 position. But, if losses go beyond $1,400, then your position will be automatically closed out. That’s why 60% (in this example) is referred to as the margin-call level, or the close-out level.
If your position is closed out in this way (commonly referred to as forced liquidation), then your account balance would be $600 – all the rest of your account having been lost.
Clint, Thanks alot.
So to summarize:
When I open my $50,000 position with a 60% margin call, Im kinda dealing with $1400 rather than just $1000 at 50:1 ? At least in as much to avoid having my position closed ?
That wouldnt change if im using a platform at 400:1 or 1000:1 correct ?
So for example $2000 in my account I take a $1,000,000 position with $1000 leaving $1000 in my account, but essentially id only have $600 I might want to risk further assuming I let my $1,000,000 position take a 40%($400/$400,000) loss ?
Am I on the right track ?
[quote=“SilverbackAttack, post:3, topic:131431, full:true”]
Clint, Thanks alot.
So to summarize:
When I open my $50,000 position with a 60% margin call, Im kinda dealing with $1400 rather than just $1000 at 50:1 ? At least in as much to avoid having my position closed ? [/quote]
If I understand your question, then yes, you are dealing with $1,400 so-called free margin – that is, $1,400 that you can lose, you can commit to initial margin on additional positions, or you can withdraw from your account. If you use up more than $1,400 in any of those actions, then your $50,000 position will be closed in a forced liquidation (margin-call).
[quote=“SilverbackAttack, post:3, topic:131431, full:true”]
That wouldnt change if im using a platform at 400:1 or 1000:1 correct ?[/quote]
I think you mean it would change.
Account leverage (50:1, 400:1, 1000:1, or whatever) determines initial margin.
Initial margin = 1 ÷ account leverage. So, 2% corresponds to 50:1, 0.25% corresponds to 400:1, 0.1% corresponds to 1000:1, etc.
For any given close-out percentage (say, 60%), initial margin determines maintenance margin (close-out level).
With 50:1 account leverage, initial margin = $1,000, maintenance margin (close-out level) = $600, and free margin = $1,400
With 400:1 leverage, initial margin = $125, maintenance margin = $75, and free margin = $1,925
With 1000:1 leverage, initial margin = $50, maintenance margin = $30, and free margin = $1,970
[quote=“SilverbackAttack, post:3, topic:131431, full:true”]
So for example $2000 in my account I take a $1,000,000 position with $1000 leaving $1000 in my account, but essentially id only have $600 I might want to risk further assuming I let my $1,000,000 position take a 40%($400/$400,000) loss ?[/quote]
This is not correct.
If you are assuming 1000:1 account leverage and 60% close-out level, then a $1,000,000 position would require initial margin of $1,000, and maintenance margin of $600. That leaves $1,400 in your account to cover losses, if you let your position build up a loss.
But –
$1,400 is grossly inadequate to support (manage) a $1,000,000 position.
$1,400 is a mere 0.14% of the $1,000,000 notional value of this position.
A 0.14% price move against your position will consume your $1,400 free margin, and result in a forced liquidation.
A 0.14% price move can occur in minutes in the most stable currency pairs, and it can occur in seconds in very volatile pairs.
Thanks again Clint. I really appreciate it. In a couple years when I get good at this if you need a favor …im your guy…lol
Im gonna to contemplate this for a bit and probably have some more questions…lol
I have alot of questions im still researching but the point about your available margin is enlightening.
In other words…its important…not only to have the margin call money calculated and left in reserve AND ALSO to be aware of what percentage the amount you left in reserve is to the notional value of your position…because…if the amount in reserve is a very small percentage of the notional value…it can get eaten up quickly…with only slight moves of your currency pair. Correct ?
For example:
I take a position at 1000:1 with a 60% margin call with $1000 for a notional value of $1,000,000
I have $1000 remaining dollars…but…$400 of that is set aside to cover the 60% margin call. So far so good. I still have $600 in my account. Everything is good and Im wheeling and dealing with $1,000,000. Lol
The problem is that $1400 is a very small portion of the whole notional value. Specifically 0.14%. And given that; a currency can move 0.14% very quickly and wipe out you $1000 + $400 maintenance margin. Correct ?
One other quick question. Why is it 0.14% ?
Wouldnt it be 1400 ÷ 1,000,000 = 0.0014% ?
Thanks again for the information
[quote=“SilverbackAttack, post:6, topic:131431, full:true”]
I have alot of questions im still researching but the point about your available margin is enlightening.
In other words…its important…not only to have the margin call money calculated and left in reserve …[/quote]
Before you enter a trade, you should know how much of your account will be required to cover margin, because, only the portion not required for margin will be available for you to use for other purposes – that is, to cover losses, to open additional positions, or for withdrawal.
As for “leaving it in reserve”, that’s not your choice, or your function. It’s done by your broker’s platform, without any action on your part.
At the moment when you hit the button to enter a new position, your broker’s platform will automatically (1) determine whether you have sufficient funds to cover the initial margin required by your new position, and (2) set aside (escrow) the maintenance margin, putting that sum out of your reach and unavailable for your use.
[quote=“SilverbackAttack, post:6, topic:131431, full:true”]
… AND ALSO to be aware of what percentage the amount you left in reserve is to the notional value of your position…because…if the amount in reserve is a very small percentage of the notional value…it can get eaten up quickly…with only slight moves of your currency pair. Correct ?[/quote]
Normally, we don’t consider that percentage. I emphasized the percentage in my last post, because your example was so extreme. You were talking about taking a million-dollar position in a piddly, little account in which there was only $2,000 to start. Your example was a recipe for disaster, and I tried to illustrate that fact by showing, in the simplest possible way, how such an account would be destroyed almost immediately.
[quote=“SilverbackAttack, post:6, topic:131431, full:true”]
For example:
I take a position at 1000:1 with a 60% margin call with $1000 for a notional value of $1,000,000
I have $1000 remaining dollars…but…$400 of that is set aside to cover the 60% margin call. So far so good. I still have $600 in my account. Everything is good and Im wheeling and dealing with $1,000,000. Lol[/quote]
Previously, we used the example of a $2,000 account in which you took a $1 million position.
Are you now using the example of a $1,000 account in which you will take a $1 million position?
I can’t believe you mean that, so I will continue to explain this example based on an account balance of $2,000.
Your numbers above are not correct.
As soon as you attempt to enter your $1 million position, your platform will scan your account to determine that you have at least $1,000 of free capital to cover the initial margin. You do, so the position will be entered. Immediately, the initial margin requirement will be replaced by the maintenance margin requirement, which is 60% of the initial margin, i.e. $600. That’s the amount set aside by your broker, and temporarily out of your control.
That leaves $1,400 of free capital in your account, to cover any losses which occur in this $1 million position.
[quote=“SilverbackAttack, post:6, topic:131431, full:true”]
The problem is that $1400 is a very small portion of the whole notional value. Specifically 0.14%. And given that; a currency can move 0.14% very quickly and wipe out you $1000 + $400 maintenance margin. Correct ?[/quote]
You are still confused about the maintenance margin. It is not $400. It is $600. It is the amount that you cannot wipe out. After your losses have wiped out the $1,400 of free capital in your account, your $1 million position will be closed automatically, in order to preserve the $600 maintenance margin.
1,400 ÷ 1,000,000 = 0.0014 – which is 0.14%
What’s your thoughts on this Clint?
I had a look at the FXpro online calc and they take into account the fx rate also when calculating required margin. I deconstructed it and threw it into an Excel template for you to play around with. Hit F9 when changing values to update the values (or turn Excel to Auto Calculate from Manual Calculate)
FX Margin & Leverage Calculator.xlsx (13.6 KB)
You can play it back to the source calculator at this link - i used GBP.USD
Example: from FXpro
Trading 3 lots of EUR/USD using 1:200 leverage with an account denominated in USD.
Trade size: 300,000
Account currency exchange rate: 1.13798
Required Margin: 300,000 / 200 * 1.13798 = $1706.97
Required Margin = Trade Size / Leverage * account currency exchange rate (if different from the base currency of the pair traded)
Should the $600 not then have to be multiplied by the FX rate at the time of the trade if the account currency is different from the base currency of the pair traded?
[quote=“RISKonFX, post:8, topic:131431, full:true”]
What’s your thoughts on this Clint?
I had a look at the FXpro online calc and they take into account the fx rate also when calculating required margin …
Example: from FXpro
Trading 3 lots of EUR/USD using 1:200 leverage with an account denominated in USD.
Trade size: 300,000
Account currency exchange rate: 1.13798
Required Margin: 300,000 / 200 * 1.13798 = $1706.97
Required Margin = Trade Size / Leverage * account currency exchange rate (if different from the base currency of the pair traded)[/quote]
Hello, James
The OP’s question at the beginning of this thread did not deal with the various ways that brokers can determine initial margin – and there are several.
His question dealt with the 60% maintenance margin (which he referred to as 60% margin call) in his particular trading platform.
So, rather than getting into the weeds on the various ways that initial margin can be determined,
I used the nominal formula for initial margin, which is Initial margin = 1 ÷ broker leverage. (In this forumula, broker leverage refers to the maximum allowable leverage offered by the broker – the leverage advertised by the broker.)
Your question addresses the specific ways in which brokers can compute initial margin, and for this we need to back up a bit in this discussion.
First, some basics.
In most jurisdictions, maximum allowable leverage (and/or its cousin, required initial margin) is dictated by regulators. And various regulators have various ways of stipulating what brokers may offer to their retail customers. Typically, a regulator will dictate that no more than a certain amount of leverage may be offered to retail clients, giving the brokers under their regime the option of offering less than the limit.
Some regulators (the U.S. CFTC being a notable example) refuse to discuss leverage, focusing instead on required initial margin. So, back in 2010, when the CFTC began their heavy-handed regulation of retail forex, they specified a minimum of 2% initial margin on major pairs, and a minimum of 5% initial margin on exotic pairs. And initially, U.S. brokers imposed those exact margin amounts.
But, immediately, there was a computational problem.
The 2% and 5% fixed margin percentages worked fine in cases where the base currency in a pair matched the account currency of the customer (USD/JPY in a USD-denominated account, for example), because brokers could conveniently specify required initial margin as $2,000 per lot, $200 per mini-lot, and $20 per micro-lot.
But, for currency pairs in which the base currency did not match the account currency, it wasn’t convenient, at all. For GBP/USD in a USD-account, for instance, the handy $2,000-per-lot formula was off by more than 50%, because GBP/USD was over 1.5000 at that time. In order to comply with regulations, U.S. brokers had to require more than $3,000 per lot initial margin on GBP/USD positions in non-GBP-denominated accounts.
Most brokers adopted one of two ways of handling the variable notional value of positions in which the base currency did not match the account currency. One method, adopted by FXCM (when they were still authorized to do business in the U.S.) was to publish a table of required initial margins for all the pairs they offered. The tables typically specified these margins as whole-dollar amounts, and they typically specified margin amounts which were above the legal minimum, so as to allow some wiggle-room in prices before the tables had to be revised.
The other way of handling variable notional values (as illustrated by the FX Pro forumula which you posted) was to simply factor actual notional values into the equation, regardless of whether the resulting margin amount was a whole-dollar amount, or not.
Different strokes for different folks (or, in this case, different brokers).
Brokers were (and are) free to determine initial margin amounts however they see fit, as long as they don’t go below the minimum required initial margins dictated by their regulators.
And just to add one more confusing element to this discussion, it isn’t really required for maximum allowable leverage to be linked to minimum required initial margin, although we almost always think of it in those terms (as in the margin = 1 ÷ leverage formula, which a gave above). There used to be (and maybe still is) a broker called YouTradeFX which advertised a high leverage limit and ZERO required margin.
I’ve long been an advocate of high leverage limits BECAUSE they generally correspond to low initial margin requirements. But, in the case of YouTradeFX, with no margin requirement at all, excessively high allowable leverage serves no real purpose, and is really just an invitation to over-trade.
You might think that it would follow logically from the way required initial margins are calculated. But, thankfully, it isn’t done that way by any broker that I’m familiar with.
And, until recently, maintenance margin requirements (also called margin-call levels, margin close-out levels, etc.) were not specified by most regulators. So, various brokers adopted levels (percentages of intital margin) which they deemed appropriate. The OP, for example, says his broker specifies 60%. Oanda (US), on the other hand, specifies 50%, and so forth.
Once determined in any particular trade, these two margin amounts (initial and maintenance) do not change while the trade is open.
As part of the new ESMA rules proposed for Europe, it will be mandated that minimum required maintenance margin shall be 50% of required initial margin.
Here’s an excerpt from a recent LeapRate article on the proposed ESMA regs –
“ESMA also outlined a margin close-out rule, which would provide for percentage of margin at which providers are required to close out a retail client’s open CFD. The aim is that, consistently across providers, clients are routinely protected from losing more than what they have invested. This rule would be implemented on a position-by-position basis, such that a retail client’s open CFD must be closed out on terms most favourable to the client at the point in time at which the available sum remaining in the CFD trading account of the initial margin and variation margin relating to that CFD falls below 50% of the amount of the initial margin posted.”
And here’s a link to the article –
Related questions to clarify.
Say my broker states that a certain currency pair must maintain a margin of .5% to avoid liquidation. If I buy a micro lot at 1.5000, is my maintenance margin $50 or $75? Regardless if the exact number, need I only ensure that my account balance never dips below 100% of that figure?
Thank you.
[quote=“philip338, post:10, topic:131431, full:true”]
Related questions to clarify.
Say my broker states that a certain currency pair must maintain a margin of .5% to avoid liquidation.[/quote]
That’s ½ of 1%. – Is that what you mean?
Or, do you mean 50% ?
[quote=“philip338, post:10, topic:131431, full:true”]
If I buy a micro lot at 1.5000, is my maintenance margin $50 or $75?[/quote]
Your question can’t be answered, until you furnish some basic information:
which currency pair are you trading ?
what is your account currency ?
what initial margin does your broker require on this trade ?
[quote=“philip338, post:10, topic:131431, full:true”]
Regardless of the exact number, need I only ensure that my account balance never dips below 100% of that figure? [/quote]
Actually, the relevant metric is the equity in your account, not the balance in your account.
But, if you have no other open positions, no other expenses (daily rollover fees, etc.) pending, and no withdrawal requests pending – then the equity in your account is the amount that will become your account balance, after you close this position.
So, the answer to your question is:
As long as the equity in your account is greater than the required maintenance margin on this position, then you will not face a forced liquidation (also referred to as a margin-call, or a margin close-out).
Thanks Clint - far more of an explanation than I was expecting. 
Clint -
Let’s say my contract size is 3000. Let’s also state that this is my only open position.
My margin would be 183 USD, correct?
As for the equity of my account, I assume this is reflected in the “Margin Balance” metric displayed in the platform’s account manager dashboard, which moves up or down as my position appreciates or depreciates.
If the market were to move against me in a big way, so that my margin balance (which reflects my open position) sinks below 183 USD, I would then be in danger of forced liquidation, since my agreement with my broker stipulates that my account must be margined 100% at all times to avoid such a situation.
What I don’t exactly understand is that, when I reference my broker’s minimum margin requirements, I see that the MMR for euro-pound is 5%. How exactly does that figure in? Of course, 5% of 3000 is 150, not 183. Is 183 derived from exchanging the 150 from euro to dollars? Thus this final step is necessary for calculating margin whenever you are dealing with a non-USD pair?
Thanks for all your help. Your answers are very thorough.
Hello, Philip
You have answered your own question. The EUR/USD rate must be factored into this calculation.
Here’s another way to look at it:
You are trading 3,000 units of EUR/GBP.
The notional value of this position is €3,000.
€3,000 = $3,676.80 at the current price of EUR/USD = 1.2256
5% of $3,676.80 is $183.84
The 84¢ difference between $183 and $183.84 is probably due to a fluctuation in the EUR/USD price during the course of this conversation.
Thanks for the detailed correct answer. At one time I also thought about this question.