Margin calculation


I am really really new to Forex and margin is a real confusion for me. When you use margin, like say I have a $1000 account with 50:1 margin, if I spend $10,000 on a trade does is first take $1000 from me and then adds $9000 and I lose whatever is lost in the trade (so if the trade depreciates to $9000 my account is blown) or is it for every $50 lost I lose a dollar?(e.x. I close a position with $9,950 so now my account is worth $999 instead of $1000)

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You wrote a long, complex question.

I’m going to break it up into parts, in order to answer the various issues you have raised.

Keep in mind that 50:1 is the maximum leverage allowed by your broker. But, don’t even think of using that much leverage on one trade, or even on several trades combined.

In the U.S., maximum allowable leverage is limited by the CFTC (the forex regulator), and 50:1 is the most that any U.S. broker may offer to retail clients.

Maximum allowable leverage determines the margin required on each trade. 50:1 corresponds to 2% required margin.

To use simple numbers, let’s say that on a particular trade the notional value of the trade is $10,000 and the required margin is $200, which is 2% of $10,000.

In the retail forex market, you don’t “spend”, you don’t invest, you don’t buy or sell, and you don’t borrow.

What you do is bet on the change in price of a base currency with respect to a cross currency. You can place a bet of any size, provided you have sufficient funds in your account to cover the required margin.

In the case of a $10,000 trade (that is, a trade with a notional value of $10,000), as soon as you enter this trade, your broker sets aside $200 of your money as margin. For the duration of this trade, that $200 is not available to you for any other use. In other words, you can’t use any portion of it to cover losses on this trade, you can’t use any portion of it for margin on another trade, and you can’t withdraw any portion of it from your account. After your $10,000 trade is closed (with either a profit, or a loss, or a break-even), your $200 margin will be released back into your account for you to use as you see fit.

No. Your broker does not “take” $1,000 from you, and he does not “add” $9,000 of his money to your account.

What he “takes” from you (temporarily) is the $200 required margin. The margin money is set aside, or escrowed, until your trade is closed — at which time, you will get it back.

As explained above, you are placing a bet on something. That “something” is $10,000 worth of a particular base currency priced versus a particular cross currency. You are not buying (or selling) $10,000 worth of that base currency.

Think of betting on a horse race. You pick the horse you want to bet on, and you decide how big a bet to place. You can bet on a horse that’s worth a million dollars, with just $2 of your own money. [I]You don’t have to buy the horse.[/I]

Well, yeah. If your $10,000 trade goes south [I]big-time,[/I] and becomes worth only $9,000, then you’re going to cover that $1,000 loss. Your broker certainly isn’t going to cover your loss for you.

No. Scratch that whole idea out of your mind.

If your trade declines by $50, you will have lost $50. Your $1,000 account will then have a balance of $950.


1 : 50 is your leverage

which means you have to put up as collateral 1 dollar for every 50 dollar in the market

collateral $ 200 = $ 10,000 in the market.

that does not mean you lose only 1 dollar for every 50, you will gain or lose as per market conditions (double edged sword of leverage)

if you are closing a position with $ 9950, which is 50 points, you will still lose $ 50 from you account.

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that was a great explanation. thank you

Required margin = notional value/leverage

In your case $10,000/50 = $200 and as Clint pointed out will be returned to you regardless of the outcome.

10,000 unit is 1 mini lot which is about $1 per pip. If price moves against you by 50 pips, you lose $50

One thing to note very seriously is “margin call” as your position will be closed by your broker. You get a margin call when your equity <= used margin. So with a $1000 account and a Maximum allowable leverage of 50:1 try not to open multiple mini lots or standard lots. This is where risk management comes in.

I hope this helps, cheers!