Hi,
Just wanted to make sure I understand this regarding Margin.
Firstly, is there a risk of a trade going bad to the extent that you owe the broker more than your account balance? Lets say an open position drops off a cliff and hence massively misses your stop loss. Can such a scenario leave you owing more than your account balance to the broker. Or is it guaranteed that your broker will (or is responsible for) closing your positions when account balance is 0?
Secondly, do brokers recalculate your margin requirements on/near every tick for open positions? I assume that’s the case and if so what’s the advice for what % margin should be of your account balance at any one time? If you’re risking 2% of your capital per trade does that simply translate to the margin requirement for a new trade not exceeding 2% of your account balance?
Thanks!
It’s hard to answer your question without knowing which broker your using and what country it’s regulated in. First off in most cases you can lose more than your account balance and end up owing money. I’ve seen it happen many times, especially with the drops we saw in oil and some of the big FX swings in March. My particular broker offers guaranteed stops and I use those on big positions or if I’m holding over the weekend.
In a lot of cases a broker will ensure the above doesn’t happen because they know it’s unlikely they will recover their funds. So they allow you to have enough margin to hang yourself, but not enough to put the account negative.
Yes brokers recalculate your margin on each tick and either allow you more or less depending on your open trades losses or profit. If your risking 2% of your account it would have very little impact on the overall available margin.
If your broker is an esma regulated broker then you will have protection from negative balance but your leverage will only be 1:30. (Different if you open a professional account).
I believe this depends a lot on your broker. I read in the school here that you have to look into what your broker’s rules are for margin levels because they each have different rules. There’s an entire section on margin trading there but I myself can’t still seem to grasp it because I always make sure I have enough margin and don’t keep a lot of open trades.