I’m this screenshot there’s a 50 pip stop. Is that the most I can lose on the trade? Does the margin change as the trade progresses? Thanks in advance!
[quote=“cdm369, post:1, topic:112160, full:true”]
In this screenshot there’s a 50 pip stop. Is that the most I can lose on the trade?[/quote]
Under normal circumstances, your loss will be limited to the dollar-value ($22.90 loss) of a 50-pip rise in price against your short position.
“Normal circumstances” means an orderly market trading through your stop-loss price with sufficient liquidity that your broker’s server can close (stop-out) your position at the specified price without slippage.
If market circumstances create a disorderly market around your stop-loss price – for instance, a gap in prices such that no trades can take place at your stop-loss price – then, you could be faced with a larger loss due to slippage.
When the market gaps past your stop-loss price, there essentially is no market within the gap, and your stop-loss order can only be filled at the next available price, which will be x-number of pips above your stop-loss price.
When this happens, which is fairly rare, the cause is usually some sudden news event which has rattled the market.
[quote=“cdm369, post:1, topic:112160, full:true”]
Does the margin change as the trade progresses? Thanks in advance![/quote]
Most brokers have an initial margin requirement and a maintenance margin requirement. In order to open a trade, you must have sufficient unencumbered equity in your account to cover the initial margin. As soon as your trade is opened, the margin requirement changes to maintenance margin, which is typically 50% of initial margin.
[U]Example:[/U]
You open a 1-mini-lot position in USD/CAD in your USD-denominated account in which your balance is $1,000. You have no other trades open at this time, so your balance is also your equity. Therefore, prior to opening this USD/CAD position all of your equity is unencumbered (not tied up supporting other margin requirements).
Let’s say your broker requires 2% initial margin (corresponding to 50:1 maximum allowable leverage). This means that you must have at least $200 of equity available prior to opening this trade ($10,000 notional value of your trade x 2% = $200) – which you do, because you have $1,000 of unencumbered equity.
After your trade is opened, the margin requirement changes to 1% maintenance margin (50% of 2% = 1% = $100). This means that losses in this position plus margin committed to other trades plus losses in those trades plus withdrawals from your account must not reduce your unencumbered margin to $100 or less – otherwise, your positions will be closed automatically by your broker in a forced liquidation.
This maintenance margin is “escrowed” (set aside temporarily) by your broker, for the duration of your trade. As soon as your trade is closed, the margin amount is released back to you and is added to your unencumbered equity.
Forced liquidations are rare, and in almost every case represent extremely poor money management on the part of the trader.
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Thank you. That answers my question.