Formula for working out equity for falling trades?

If I buy at 100:1 leverage 1 million USD and it goes against me 3 or 4 cents in a hurry, is there an exact formula to determine how much money I need to cover my position if I wait it out on and above my margin deposit for the 1 million which must be \$10,000 more or less?

I am not worried at the moment how bad my strategy would be by holding on, I just want to determine the formula so I know exactly how much funds I need at all times to cover any position.

The ECN I was looking at doesn’t close a position if my equity runs to zero, so I want to make absolutely sure I know how much I need for any fall against me.

A million would be 10 standard contracts.

Let’s start this off by saying if your initial deposit was \$10,000 you wouldn’t be able to trade 10 standard contracts because you would deplete your margin.

The amount per pip depends on the pair, but figure roughly \$10.00 a pip per 100k leveraged, so you would be trading \$100 dollar pips.

If it moved 3 or 4 cents against you, you would be out either \$30,000.00 or \$40,000. So with an initial deposit of 10k, you would be looking at dumping in another 20 or 30k to cover your unrealized losses…

Here’s a very simple equation:

Margin Required = Initial Margin + (Pips Lost x Pip Value)

So, if you’re initial margin is \$10k, you risk 400 pips, and the pip value is \$100 for your position size:

MR = 10,000 + (400 x 100)

Which means you’d need \$50,000 in your account to ride out a 400 pip loss without getting a margin call…

[I]Note: Depending on your broker, the requirement may be a bit lower, based on whether their initial and maintenance margin requirements are the same.[/I]

Thanks Rhody!!! I need things in formulas to understand it sometimes. I know I also have to make sure I have enough money to cover the rollover costs as well. I will be studying your equation tonight just so I make sure I make no mistakes.

One thing that is not clear in my mind is, that many people say when a currency falls against you, you lose x amount of \$\$\$. But, that is all recovered, except for the rollover fees etc, if it swings in your favor and moves past the point you purchased the position doesn’t it?

In my mind, the way I understand it right now, if I hold on until it swings in my favor, I’ve lost nothing as long as I cover the falls. Is my thinking correct?

Thanks for your reply and helping me understand better! I didn’t think it was a solid trading plan, but needed to understand the equation so I can work from there.

Spot forex is marked-to-market. That means technically every dollar made or lost while a position is open is real. It’s not paper. If you’ve got an open position that’s up \$1000, you can withdraw that money without closing the trade (so long as you still have sufficient margin funds in the account).

Thanks for clearing that up for me! I think I am slowly understanding things now. I’m eager to go live, but still don’t enough to risk it yet.