I would just like to have someone confirm my understanding of leverage & Margin & Margin call and before anyone suggests, i have been through baby pips a few time now, but feel like I’m still missing something.
I did search using various margin & leverage & margin call, but nothing hit exactly what i was looking for. I apologise for my noobishness… haha, but we have to start somewhere
okay for my example to keep the numbers easy(for my benifit ofc):
What I’m trying to figure out is where a margin call would be done,
usable margin / pip value = # pips drop to MC
$9,900.00 / $1.00 = (9,900 pips - spread pips)
That seems like an awful lot of pips to drop before you would get margin called. Is there an error in my thinking / understanding??
There’s one little problem with your math. Margin is based on the value of the position, not the unit size. If you’re trading as USD base pair then it’s the same, but if your trading a non-USD based pair (XXX/USD) then it’s not. For example, if GBP/USD is trading at 2.00, then a mini lot has a value of $20,000, not $10,000 as your example. That means your 1% margin requirement would be $200, not $100.
Having said that, your understanding is otherwise fine. A mini contract traded on a $10k account means you’re actually employing very little leverage to make your trade. Thus, it would take a major move against your to get a margin call.
You didn’t ask for what i’m going to write, but some how i feel where your thinking is going…
Basically your math is right as what rhody said is also true and somethik to bare in mind before clicking buy/sell.
However your statement " That seems like an awful lot of pips to drop before you would get margin called. " is wrong.
the reasons?
it is a lot, but i’m 100% that you wont be trading just 1 pair
you will enter more trades in different pairs ( because you have a lot of margin left, OFC!!!).
learn Money management before you do no.2.
after you have entered 3 or 4 trades you will see that roughly from a 9.900 pip spread per trade you will get to a quarter of that ( supposing you will have 4 trades open) and that is roughly 2200 pips per trade.
now look at what has happened to the xxx/JPY pairs and you will see that in theese volatile times 2200 is not a great deal of spread ( hint : gbp/JPY).
6.probably to “adjust” your postion you will enter more trades to buy lower, at better prices even if the price will be falling, or you will hold the position deep out of the money ( aka: in RED) that will shorten your margin even more.
So before you do all the mistakes that others ( me including) have done, play with a game account and “test” margin requirements, and margin calls.
use sproportionate ammounts just to see how a margin call looks like!
the 1% “rule” is a safety exit for traders, because when the trade goes against you it “easyer” to cut your losses, after all you lost “just” 100 dollars for a -100 pip position, on the other hand keeping your trade going positive, as you will see is much easier.
Thanks for your replies, they are much apreciated.
I’m in a demo now going on about two months, and basically I consider myself very conservative. I have been focused on developing a trading strategy that works as opposed to see where the margin call would be, that said i’m going to exactly do as you suggest to find out.
So before you do all the mistakes that others ( me including) have done, play with a game account and “test” margin requirements, and margin calls. use sproportionate ammounts just to see how a margin call looks like!
And until I become VERY comfortable with my trading style, i’m only looking at trading 1 pair with very strict money management.
I hate to lose my hard earned money So hopefully my conservative approach will ease the pain of learning lessons $$$. First though, i need to further develop my trading system as good MM only prolongs the wipeout…haha (I stole that quote from rhody;))
I must say this forum has been a tremendous help in learning about the market. I would probably be out $10k by now if i had not found this place first. Thanks to all who help us noobs aong the way,
There’s one little problem with your math. Margin is based on the value of the position, not the unit size. If you’re trading as USD base pair then it’s the same, but if your trading a non-USD based pair (XXX/USD) then it’s not. For example, if GBP/USD is trading at 2.00, then a mini lot has a value of $20,000, not $10,000 as your example. That means your 1% margin requirement would be $200, not $100.
Well Im using IBFX for a demo account and it doesn’t matter what currency i trade @ 200:1 the margin is always $50 per mini lot for every pair???
If that’s really the case, then IBFX is denominating all of their lots in USD. That means you are trading atypical position sizes when you aren’t trading a USD-based pair. For example, if EUR/USD is 1.45 and you trade a mini lot that means you are in for about 690 EUR, not 1000 like you would be with most brokers.
So hopefully my conservative approach will ease the pain of learning lessons $$$. First though, i need to further develop my trading system as good MM only prolongs the wipeout…haha (I stole that quote from rhody;))