Hi ,
Can any one please explain me regarding margin.I went to baby pips and lot of other sites but i cannot able to understand it clearly. Let us assume that we use 50:1 leverage and 100$ account then how much margin do we require.
Thank you ,
lifeboat
Try starting here first.
I’m not assuming you’re trading with a $100.00 account, but, if you are, you should read the above and understand it thoroughly.
As for leverage, try this: Oanda
There are tons of youtube videos out there too…just pop in “Forex leverage explained”
Good luck out there!
Hope this helps.
Take a look at this video
I don’t know what trading software do you use but for me FXCM TS2 has made it very simple.
I have the margin for 1mini in the MMR column.
I enter the trade with a SELL: 1k (mini) in EUR/USD.
Equity = 100 - nr_lots * MMR - nr_lots * spread * pip_cost = 100 - 1 * 5 - 1 * 2.5 * 0.07 = 94.825 euro
How big is the distance to the margin call ?
94.825 = distance_pips * nr_lots * pip_cost
dist_pips = 94.825 / 0.07 = 1354 pips to margin call
Conclusion: you can enter the market in any direction with 1k (mini) and leave it there until one of 2 things happens:
Good luck.
Hi LifeBoat,
US regulations limit leverage on forex trades to 50:1. That means your open positions cannot have a total face value greater than 50 times the equity in your account. To enforce this limit, the CFTC set the minimum margin requirement on forex trades at 2% (because 2% times 50 equals 100%).
If you start with $100 in your account, then the maximum you can have in open positions is $5000. That’s because $100 must be set aside as margin for a 5k position.
However, if you had 5k in open positions with only $100 in your account, the moment the market price moved even 1 pip against your trade, your equity would drop below $100 resulting in a margin call. That’s no way to trade. For this reason, good traders never use the maximum leverage available to them. (That would be like driving your car at 155 mph on the road simply because that’s the top speed the car can go.)
Instead, a good rule of thumb is to limit yourself to 10:1. With $100 in your account 10:1 leverage would mean you could open a single 1k trade. A trade size of 1k is also known as a micro lot.
To trade 1k of USD/JPY would require you to set aside $20 as used margin, leaving you with $80 as usable margin to manage your open position. This usable margin is important to make sure you have enough wiggle room to avoid a margin call if the market price goes against your trade, because once your usable margin falls to zero, you would get a margin call.
Hi! I was also having some trouble understanding margin and leverage and I’ve answered this before here and ive got a very good in depth response from Clint thought it might be helpful to you and there you go!
Hello, rookie
Let me answer your last question first. Yes, it’s greatly to your advantage to have leverage available in your account. In fact, the more leverage available to you, the better — because high available leverage corresponds to low required margin.
The leverage available to you from your broker is often called maximum allowable leverage, or broker leverage, or simply account leverage. And I’m guessing that this is the “type” of leverage you are referrring to, when you say that you are “trading with 20:1 leverage”.
If your account allows you to use up to 20:1 leverage, then your trading platform is automatically setting aside 5% of the notional value of each trade as margin (because 1 ÷ 20 = 0.05 = 5%).
Here’s how that works: Let’s say that your account is denominated in USD, and you enter a 100-unit trade in GBP/JPY. The notional value of your trade will be the USD-value of 100 GBP. Suppose the price of GBP/USD is 1.6760 at the time your trade is entered. This means that £1 = $1.676 (note that I’m showing this price using a decimal point where you would use a comma). If £1 = $1.676, then £100 (which is the notional value of your trade) = $167.60. And the required 5% margin would be $8.38.
Caution: Check with your broker to find out exactly how he calculates margins. Many brokers establish “price bands”, such that the margin required for a particular size position, in a particular pair, will be constant as long as the price of that pair stays between certain upper and lower limits. If your broker does that, then the actual margin required on a particular trade will be approximately 5% of the notional value of the trade.
Let’s assume that the margin in the case of the GBP/JPY trade in the example above is exactly 5%, equal to $8.38. As soon as your 100-unit trade is entered, your platform will automatically designate $8.38 as margin, and this sum will be unavailable to you for covering losses, or for withdrawal.
Some, or all, of the remaining $71.52 in your account ($79.90 - $8.38) will be at risk for the duration of your trade, depending on where you place your stop-loss.
Let’s say that you place a stop-loss 30 pips away from your entry price. (Note that the 30 pips you are risking includes the spread on your GBP/JPY trade.) And let’s say that 1 pip is worth $0.01 (1 cent). If your stop-loss is hit, then you will suffer a loss of 30 pips, which equates to a monetary loss of $0.30. This amount is quite a bit less than 1% of your account balance. So, let’s find out how large your GBP/JPY position should be, such that your 30-pip stop-loss puts 1% of your account at risk.
You could calculate your position size by hand, but it’s much easier to use a Position Size Calculator, such as this one.
For the GBP/JPY trade in the example above, you would use the drop-down menus to select USD for your account currency, and GBP/JPY for your pair; and you would enter 79.90 for the account balance, 1 for the risk percentage, and 30 for the stop-loss. Note that the Calculator then asks you for the current price of the USD/JPY (because your account is denominated in USD, and your pair is priced in JPY).
I entered these numbers into the Calculator (using a price of 101.80 for the USD/JPY), and got the result:
Your position size in this trade should be 271 units, in order to make the 30-pip stop-loss assumed in the example correspond to a 1% account risk.
Play around with the Position Size Calculator, using different pairs, and various stop-loss figures, to see how it works and to get comfortable with it. It’s a handy tool.
The term leverage is often used to describe the margin requirements. For example, leverage of 50:1 corresponds to a margin requirement of 2% (1 divided by 50 is 0.02 or 2%). A 2% margin requirement means that, if you wish to open a new position, then you must have 2% of the size of that position available as margin. Another way of saying the same thing: for each dollar of margin available you can make a $50 dollar trade.
Thanks every one
1.so margin is calculated on the open positions not on the leverage which we selected when creating the account. What i mean is that if an account is created and selected 50:1 leverage initially at that time we dont require any margin but if we are opening any position then leverage is calculated based on the open position right?
2.Is margin also calculated for the pending orders?
Regards,
Lifeboat
Thank you.
But I heard that margin will there for pending orders also
I guess it could vary from broker to broker
Hi LifeBoat,
TradeItSimple is right, pending orders should not count against your required margin.
However, I would add that you should be careful to make sure your pending orders do not risk taking you over your desired leverage limit in the event the orders do get executed. I mentioned earlier about trying not to exceed 10:1 effective leverage.
For example, in one of my trading accounts I run a combination of several automated strategies which at any given time could have anywhere from 0 to 11 trades open at once. I make sure I have enough capital so that even if all 11 strategies have an open trade, I still do not exceed 10:1 leverage.
Leverage and margin are things which be related. Leverage can affect margin which we require to open position. And i we use low leverage, required margin will be higher and the opposite. For trading, i just maximize leverage 1:500 from tenkofx. It’s also enough for me to trade in forex.