Sorry for the rookie question. I would like some help on trying to understand how the margin call would happen, the broker has mentioned if your equity is below 50% you will get a margin call/positions closed. Is my below example correct ? if not can you correct it so I can make sense of it all please.
If my Account Balance is $1,000 and I buy 1 mini Lot of Gold @ 1300 using margin .7% =$91.00 (margin required) total notional $13,000
Remaining equity in my account would be $909
If Gold moved down to $1250, my running PnL would $503.50 (10 x $50 + variation margin $3.50) my remaining Equity would $496.50
Equity in percentage 496.50/1000 = 49.65% So now I would get a margin call ?
In your example, you are trading a USD-denominated account somewhere outside the United States (the U.S. no longer allows trading in spot gold via CFD’s through forex brokers.)
[U]Your example involves[/U]:
Position size: 0.1 lot (which you are calling a mini-lot). One lot is 100 ounces of gold. Therefore, 0.1 lot is 10 ounces of gold. That’s where the 10 comes from, which you asked about in your second post.
Initial margin: 0.7% Are you sure that’s correct? It’s a strange number. That margin percentage corresponds to leverage of 142.86:1, which also is a strange number. Anyway, assuming that the 0.7% figure is correct, then the $91 margin amount is also correct.
Maintenance margin: It’s standard practice in the industry for brokers to specify a margin requirement LOWER than the initial margin, which kicks in as soon as your position is opened. This maintenance margin (margin required to maintain your position) is confusingly stated as a percentage of a percentage. That is, in the case of your example, 50% of the initial margin percentage. You can lose almost all of your account to an adverse price move, but you cannot lose the maintenance margin, because your broker will close your position in a forced liquidation, commonly referred to as a margin call, when the equity in your account falls to the maintenance margin level. In the case of your example, if the $91 initial margin amount is correct, and if the required maintenance margin is 50% of that – meaning $45.50 – then you can lose all of your account EXCEPT that last $45.50.
A hypothetical $50/ounce adverse move in the gold price: If the price of gold moves $50/ounce against you, and you have 10 ounces onboard, then your dollar-loss would be $500. The equity in your account at that point would be $500, which is well above the $45.50 margin-call level. The gold price would have to move $95.45/ounce against you, in order for a margin-call to be triggered. If that happened, then you would be left with $45.50 out of your original $1000 balance.
In the case of forced liquidation (margin-call), you lose all of your account except the $45.50 maintenance margin.
The $91 initial margin was never a “deposit”. It was the threshold you had to meet or exceed, in order to be permitted to place your trade. Think of it this way:
You want to place a trade.
Your broker says, “Okay, provided you have at least $91 in your account – and you do, so you’re good to go.”
Your position is entered.
As soon as your position is entered, that $91 figure no longer applies to anything. A new requirement has been imposed on your account, which is that the equity in your account must remain above 50% of that previous $91 margin amount. This new requirement is frequently referred to as “maintenance margin”, although some brokers use different terminology.
This maintenance margin ($45.50 in the case of your example) is not a “deposit”, either. It’s simply money already in your account which you will not be permitted to lose, while this position is open.