Margin - how much can you lose?

If you trade on margin, say $500 or $1,000 for example… and I’d assume even with stop losses things can go wrong (miscalculate the stop loss, or you forget to set a stop loss, etc), say your trade goes bad fast… does the broker automatically close out your position once you hit your margin so you’re only losing your margin?

Or can you technically end up owing the broker thousands and thousands of dollars?

Do you need to have good/decent credit to trade on margin? I’ve heard brokers don’t check credit, is that really true?

Thanks

You can only lose as much as you have in your trading account. If you put $100 in, you can only lose $100, period.

And there is no credit check to trade with leverage. :slight_smile:

[B]natv,[/B]

Generally, the broker closes your position, once your balance falls to what’s called the “maintenance margin”, at which point you lose all of your money [B]except your margin[/B]. When the position has been closed, the margin is freed up, and appears as your account balance.

Here’s an example. Let’s say you have a very small mini account, with a $100 balance. Your broker offers you up to 200:1 leverage, which means that the margin requirement on 1 mini-lot (10,000 units of currency) is $50 (because $10,000/200 = $50). Let’s assume that the maintenance margin required = the initial margin required (which is the case at many brokers, including FXCM).

You open a 1-mini-lot position in the GBP/USD (in which 1 pip = $1). At the moment when you open this position, the spread offered by your broker on the GBP/USD is 3 pips. Therefore, as soon as you open this position, you incur a “loss” equal to the spread. So, at the moment that you open this position, your account reads as follows:

[B]Balance $100[/B] (this was your cash position prior to opening this trade)

[B]Equity $97[/B] (this is what’s left after deducting the spread)

[B]Margin Used $50[/B] (this portion of your money is “set aside”, and not available to cover losses)

[B]Usable Margin $47[/B] (this portion of your money is available to cover losses)

Let’s say that the GBP/USD price moves against you by 47 pips (which equals $47), completely using up the Usable Margin in your account. At this point, the broker will automatically close your position. Your account will show that you have incurred a loss of $50 (which is the 47-pip price move + the 3-pip spread). Your previous Margin ($50) has been returned to your account. Your account Balance is now $50 (which is the Margin returned to you). [B]You have lost your entire account except for the Margin.[/B]

[B]The purpose of margin is to protect the broker, so that losses incurred by you only consume your money, not the broker’s money.[/B] In the example above, it worked just that way, because the market was orderly enough that the broker could close your position when your Usable Margin fell to zero.

But, suppose the market is not orderly. Suppose some catastrophic event causes the GBP/USD to gap down 100 or 200 pips, theoretically creating a negative Balance in your account. Then what? Who takes that loss? Well, your position will be officially closed (on the books) at the price corresponding to a zero Balance in your account. In other words, you will have lost your entire account, including the Margin (which you got back in the example, above). And the rest of the loss will be borne by the broker.
As Phil stated in the previous post, you can lose all of the money in your account, but not more than that.

I hope that helps.

Clint

Thank you Clint for that detailed reply, that was very helpful.

I was worried that I can lose a portial of the leveraged amount (ie - up to $10,000) and end up owing the broker money.

Of course I don’t want to lose my margin, but if that is the worst case scenerio, since I’d only be trading with funds I’m prepared to lose in a worst-case-scenario, I’m comforted in knowing this.

Nat