Good day guys,
I have read about margin, but I still don’t understand how it functions.
For instance, if my account balance is $200 and I entered a trade with calculated margin $60 based on the lot I ordered, what happens if the trade goes against me?
Will my position be automatically closed when my equity falls to $60 or when my equity falls to $200 - $60= $140?
Thanks in anticipation
Hello, George. Welcome to this forum.
Margin is the amount of money you must have in your account (1) to open a position, and then (2) to hold that position. In every position, [B]margin represents money which cannot be lost[/B] if that position goes against you. Let’s expand on these ideas.
There are 2 types of margin: initial margin and maintenance margin.
• [B]Initial margin,[/B] as the name implies, is the margin you must have in your account in order to open a particular position. In the example you cited, your broker requires that you have at least $60 in your account in order to open the position in question — and this amount may not be currently committed to margin in any other position. In other words, margin dollars cannot be used for two or more different positions at the same time.
• [B]Maintenance margin,[/B] again as the name implies, is the margin you must have in your account in order to maintain (hold onto) your position. In most cases, maintenance margin is lower than initial margin, sometimes by as much as 50%.
So, depending on your broker’s margin policy, you might be required to have at least $60 initial margin in your account in order to open your position, and then be required to have at least $30 maintenance margin in your account for the duration of your trade. Let’s assume that this applies to your account.
Let’s walk through the steps:
You have $200 in your account. You want to open a particular position for which your broker requires initial margin of $60. You have no other positions open at the present time, so all of your $200 balance is “available margin”. In other words, you have much more available margin than this position requires.
Your position is opened, and immediately maintenance margin ($30, instead of $60) becomes the margin required by your position. Here’s what that means: If your position goes badly against you, it can draw down your account from $200 to $30, but no further. If a devastating drawdown depletes your account to $30, your position will automatically be closed, and that $30 will be all that you have left. This is referred to as a margin-call.
If you wanted to enter a position which was twice as large as the example above, both the initial margin and the maintenance margin required would be twice as much.
If you entered the position in the example above, and then — while your position was still open — you entered another position, then initially you would have to have the maintenance margin on your first position PLUS the initial margin on your second position in your account. Then immediately the margin required on your second position would change to maintenance margin, as well. As long as both positions remained open, you would have to have the maintenance margin on position #1 plus the maintenance margin on position #2 in your account.
I hope that answers your questions.
Thanks Mr Clint,
Now I get it.