Margin call once more

Beginner Questions
1

hi folks,
i think the explanation of a margin call here on babypips is not the best.

its says: balance 10,000… open new position for 8,000… once the equity drops below 8,000 i will get a margin call.

but that would be at 100% used margin (margin call: equity < used margin*xxx%)

that implies you are not able to use all your balance for opening positions, because once a position drops 1 pip you’ll get a margin call… right?

OANDA sends a margin call at 50% used margin… so if you use your entire balance you’ll get a margin call once your equity drops below 5,000.

but why 50%, not 0% and why refers the example here on babypips to 100%???

many thanks!

2

Hi, daros

I think you are confused about Used Margin and Usable Margin.

The example in the Babypips School is based on a ridiculously large position — 80 standard lots. In other words, the position size is [B]8 million EUR.[/B] Also, the example ignores the Spread. And it assumes that Maintenance Margin = Initial Margin (more on that in a moment)

[B]Let’s use the same numbers as in the example, so as not to add more confusion at this point.[/B]

After the 80-standard-lot position was opened, Balance was $10,000, Equity was $10,000, Used Margin was $8,000, and Usable Margin was $2,000. Let’s see where those numbers came from.

[B]Balance[/B] refers to the funds which were in his account [B]before any of his open positions were opened.[/B] So, prior to this 80-lot trade, his Balance was $10,000. And, [B]until his position is closed,[/B] his Balance will remain at $10,000.

[B]Equity[/B] refers to what his Balance would be, if all his open positions were closed right now. Equity does not take Margin into account, and in this example the Spread is being ignored. Equity does go up or down, as open positions show profits or losses. But, in the example, there has been no profit or loss in the 80-lot position, yet. So, Equity is still $10,000.

Note that profit or loss on open positions is called Open P/L (or Floating P/L). When those positions are closed, Open P/L becomes simply P/L (or Booked P/L).

[B]Margin[/B] refers to a portion of his funds which his broker freezes (impounds, sets aside, or places in escrow) as a sort of performance bond. The trader will not be able to access that Margin amount for any purpose, for the duration of his trade. When his position is closed, that Margin amount will be un-frozen, and the trader may use it (or withdraw it) as he sees fit.

In the example, the 80-lot position required a Margin amount of $8,000. And, because the trader was using this amount of Margin, it is called [B]Used Margin.[/B] That sum is frozen, and he can’t draw on it to cover any losses which might occur in his position. Therefore, the only funds available for covering losses would be the $2,000 which is not frozen (not committed to Used Margin). This $2,000 portion of his account is referred to [B]Usable Margin.[/B]

When losses had consumed all of the $2,000 of Usable Margin, there was no more Usable Margin left — and the very next pip of loss triggered a [B]Margin Call.[/B]

[B]Just before the Margin Call,[/B] the numbers in this example were: Balance = $10,000, Equity = $8,000 (because $2,000 had been consumed by losses), Used Margin = $8,000 (this figure hasn’t changed), and Usable Margin = 0 (because it was all consumed by losses).

[B]Immediately after the Margin Call,[/B] the numbers would be: Balance = $8,000, Equity = $8,000, Used Margin = 0, and Usable Margin = $8,000.

Note: There is an error in the School example at this point.
The School example shows Usable Margin = 0, after the Margin Call, and this is incorrect.
The correct figure is $8,000, as above.

[B]Let’s distinguish between Initial Margin and Maintenance Margin.[/B]

In the example above, the trader was allowed to use all of his Usable Margin to cover his losses, but he was not allowed to use any of his Used Margin to cover losses. When all of his Usable Margin had been consumed, he got a Margin Call.

Some brokers allow a portion of Used Margin to be used “again” to cover losses. In your post, you referred to the Oanda policy: Maintenance Margin = 50% of Used Margin. Let’s see how this would affect the School example, above.

With 50% Maintenance Margin, the trader would have to commit $8,000 Used Margin in order to open his position, but he would not have received a Margin Call after $2,000 of losses. Instead, he would be allowed to hold his position for an additional $4,000 of losses (50% of the Initial Margin amount of $8,000).

If he did this, then the numbers would be as follows:

[B]Just before the Margin Call,[/B] the numbers would be: Balance = $10,000, Equity = $4,000 (which is his Balance minus $6,000 total losses), Used Margin = $4,000 (this is the Maintenance Margin amount), and Usable Margin = 0.

[B]Immediately after the Margin Call,[/B] the numbers would be: Balance = $4,000, Equity = $4,000, Used Margin = 0, and Usable Margin = $4,000.

I hope that helps to clear things up for you.

3

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4

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5

Busted.

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6

Margin call is a very common word in forex trading and every person who have experience of forex trading may have experience of margin call. It is a call given by broker to close the open orders if you in floating minus and have not enough amount to keep open the orders.

7

clint, thanks for your detailed reply!!!

what is the reason for a margin call at 50%, [B]as long as there is equity left?[/B] 0% certainly would be too risky for the broker because of sudden drops. but i can’t see a reason why it’s not 2-5%?

8

I’m hoping that you understand that the 50%, or 2%, or 5% figure that you are talking about is [B]a percentage applied to a percentage.[/B]

Every broker in the world, except one (that I’m aware of), requires some amount of initial margin. Here in the U.S., that margin amount is 2% of the notional value of each retail spot forex position. That required margin amount is mandated by the CFTC, the regulator having authority over U.S. retail forex.

The 50% figure that you referred to is the percentage of the initial margin which Oanda requires as a maintenance margin. In other words, it’s 50% of 2% — which is 1% of the notional amount of a position.

Let’s convert these margin amounts to their equivalent leverage amounts.

An initial margin requirement of 2% corresponds to maximum allowable leverage of 50:1. But, in the case of Oanda, 2% doesn’t really mean 2%, and 50:1 doesn’t really mean 50:1, because when losses threaten to trigger a margin call, suddenly 2% becomes 1%, and 50:1 becomes 100:1.

If margin serves any purpose at all, then backing it down, just when it’s about to take effect, seems a lot like moving a stop-loss farther away from your entry price, just before you get stopped out. If margin provides some sort of protection to either the customer, or the broker, or both, then what’s the point of taking the protection away, just when it’s about to take effect?

Your suggestion to reduce that 50% figure to something like 2%-5%, implies this: As losses mount in a retail forex account, and a margin call becomes imminent, suddenly maximum allowable leverage would change from 50:1 to [B]1000:1[/B] (in the case of your 5% figure), or [B]2500:1[/B] (in the case of your 2% figure). So, in this scenario, what was the point of a 50:1 leverage limit in the first place?

I have often said that if I had my choice of terms, I would demand 10000:1 maximum allowable leverage — not because I want to use astronomical leverage, but because I’d like to have near-zero margin. I had always assumed that maximum allowable leverage and margin were mathematically tied to each other. Then, I came across a broker who imposes a leverage limit (500:1) on trades, but requires no margin on those trades — and I couldn’t figure out how that’s even possible. (Obviously, this is not a U.S. broker.)

Well, it turns out that if a broker imposes a margin requirement, then a maximum allowable leverage figure is automatically implied. But, the reverse is not necessarily true: [B]a maximum allowable leverage figure does not automatically imply a margin requirement.[/B]

So, lately I’ve been questioning the whole idea of margin. Does it actually serve any purpose? The CFTC claims that it’s all about customer protection. But, the CFTC has a hidden agenda regarding retail spot forex trading which has nothing to do with protecting customers. So, I disregard everything they have to say on the subject.

Bottom line: I don’t see the logic in your 2%-5% suggestion. I don’t see the logic in having different Initial Margin and Maintenance Margin requirements. And I’m starting to question the necessity for margin, in the first place.

9

If you do propper rsik and money management you don’t need to worry abut this calculation.

10

More like if you put a stop and not a martingale stop you are unlikely to have to deal with margin calls lol.

11

Marginal stop? Too much for me lol A 50% margin for forex is expensive. Brokers usually set between 15% - 20%, 50% is a total ripoff in my opnion

12

That too, forgot abut it, never leave and order unprotected.

13

clint, thanks for your help!

this means, i will never be able to use my entire balance as margin if my broker gives me a margin call at 100%.

btw, this is not because i need this information for trading! just general questions.