Is Margin Requirement Fixed?

Beginner Questions
1

Hello,

I’m close to signing up with MB Trading, and I have found that their margin requirement is 1%. Does this mean that it is 1% for [B]any[/B] single trade regardless of how much your leverage is (assuming 100:1 [B]maximum[/B] leverage) and how many lots you purchase?

[I](assuming USD-based pairs)[/I]

For instance, if you start out with $1000 and purchase 1 lot of $10,000 (10:1 leverage), is the margin requirement[B] $100[/B] (1% of $10,000), leaving you with [B]$900[/B] to protect yourself from a margin call (ignoring spread, commission, and rollovers)?

Or if you have $5000 in your account and purchase 10 lots of $10,000 each (20:1 leverage), is the margin requirement still[B] $1000[/B] (1% of $100,000), leaving you with [B]$4000[/B] free?

Just want to make sure I understand this crucial point correctly.

Thanks!

2

Your math is correct, but you seem to be a little confused. Margin requirements and leverage are pretty much the same thing, one is just expressed as a percent and the other a ratio.

If you increased you leverage to 200:1, your margin requirement would change to .5%, and if you decreased it to 50:1 your margin requirement would jump to 2%.

As for how many lots you purchase, your leverage is normally irrelevant to that, but there are some brokers that have restrictions on how many lots you can trade at high leverages. You’ll have to look up your brokers policy on that.

3

That’s strange, because that’s different from how it’s explained on this page from the babypips.com School:

Margin Calls: Example of a Forex Currency Trading Margin Call

In the example the guy has $10,000 in his account. It also states that his margin requirement is 1%. He purchases one lot (mini account) of $10,000, which is an actual leverage of 1:1. And yet his margin requirement remains 1%, which is why only $100 of his $10,000 (1%) is put up as “used margin.” He retains $9,900 as protection against a margin call.

Then when the guy purchases 80 lots of $10,000 each (or $800,000), his used margin (still 1%) becomes $8,000. That’s still a margin requirement of 1%, even though his leverage is now 80:1. $800,000 is worth 80x more than what he has in his account.

On this page:

Margin: Forex Currency Trading Margins Defined

The chart shows that required margin and maximum leverage have an inverse correlation. But it’s talking about maximum leverage, and not the actual leverage that is used.

But based on what you said, the less your money is leveraged, the higher the margin requirement becomes, meaning that if you used NO leverage at all (1:1), then the required margin would be 100% of your account. That would mean you would lose automatically just from the spread.

I also don’t understand what you mean when you say the “leverage is irrelevant to how many lots purchased.” Isn’t by how much more your trade is worth versus how much money you have in your account what actually determines your actual leverage?

==========================

Plus, it says right here on this page:

More Leverage: Maximum & True Leverages for Forex Currency Trading

That it’s maximum leverage that determines the required margin, and that true leverage is “the full amount of your position divided by the amount of money deposited in your trading account.”

Then the example given on the page further confirms all of this.

So my understanding is that the maximum leverage determines what the margin requirement (used margin) of your trades will be, regardless of what your actual/true leverage is. It is also my understanding that your actual/true leverage is determined by how much your trade is worth (how many lots you purchase) divided by the money actually in your account. In other words, the actual/true leverage is the dependent variable, and the independent variable is the value of your trade divided by the money in your account … not the other way around. Meaning how many lots you purchase and how much money you have to begin with is what determines what your actual leverage is.

At least this is how babypips.com has explained it.

4

Actually, I went back and thought about it, and I came to the realization of why there is a discrepancy between what we’re saying.

It’s simply because of our different definitions of “leverage.” You see, apparently when you were referring to “leverage,” you were comparing the value of your trade versus your [B]used margin[/B], or what is actually taken for use by the broker. Whereas what I meant when referring to “leverage” was the value of your trade versus the [B]total money[/B] used for trading (in the account). Meaning the sum of the used as well as usable margins.

But in actuality, it doesn’t really matter which way you look at it, as long as you understand after how many pips you shall receive a margin call … or in other words, as long as you know how well you should protect yourself by deciding how much to risk.

That’s obviously what you meant also when you said that how many lots you purchase doesn’t really have anything to do with your leverage … because if your broker has a 1% margin requirement, the the leverage will always be 100:1 [B]if[/B] you’re talking about the used margin, and not the total account size.

It’s actually pretty humorous now that I understand why we were saying different things.

5

Yep, you’re right. The confusion is because we are using different definitions of the word “leverage.”

Just so you know the definition I was using is the common usage of the term. When you hear someone say “leverage” 99.9% of the time they are talking about it the same way I was.

If you use the word leverage in the context you were using it you’re going to encounter a lot of confusion. :slight_smile:

But like you say, it doesn’t matter anyway. Trade a reasonable percentage of your account per trade (1-3%) and you will never need to worry about leverage, used margin, margin calls, or anything like that.

6

Actually, to avoid even more confusion… :slight_smile:

He means “risk” 1-3%, not “trade” 1-3%.

7

Yeah, I need to be more careful with my words when it comes to brand-new traders. :slight_smile: