I just finished school and am looking forward to getting into some demo work. One thing I need someone to help me understand though is Margin.
I get the technical definition and the details behind it. I understand what it means, I just don’t get what I’m missing behind it.
Let’s say for example I have a 5K account and my broker is allowing me 100:1. Let’s say I put in 1K of money and no control a $100,000 position. I understand this would leave me with 4K of usable margin left, but what happens if my position sinks like a rock.
I get at some point there would be a margin call, but what if my position loses more than 5K? Where is that difference being made up?
Obviously margin calls prevent this from happening as no broker is going to cover any non-secured losses, so I guess can someone explain better how this all relates to each other?
You would need to calculate where to place your Stop Loss so as not to risk more than 1%-2% of your account.
That way, if the trade goes against you and you get stopped out, you only lose the percentage you risked, not the whole $1,000 and certainly not your entire account.
For example, risking 1% of your $5,000 account ($50), you would set your Stop Loss so that you only lose $50. Not $1,000 and not $5,000.
For simplicity, say you trade EUR/USD. A standard contract ($100,000) is worth $10/pip. So, risking $50 means your Stop Loss would be 5 pips. Not much room to maneuver but you could always use a mini contract ($1/pip = 50 pips Stop Loss) to give you a better chance of surviving a slight pullback.