Question on Babypips School Lesson on Margin Call

Can anyone help me with this regarding this lesson:

Margin Calls: Example of a Forex Currency Trading Margin Call

In the example, the trader has a $10,000 mini-account. He buys 80 lots of Euro for $8000.

Since he has 80 lots, one pip = $80.

But when the lecture calculates how much pips against me it takes for a margin call, he uses the unused margin ($2000) to calculate. Thus 25 pips ($2000/$80).
Im confused, shouldn’t it be based on the amount I put in, in this case $8000? So it will take 100 pips before I get a margin call?

Why should the unused margin matter when it wasn’t put into play?

Think of it this way… You have $1000 in the bank and you want to rent your dream house. So you put a $800 security deposit on the house, leaving you $200 in your savings account.

A few months later you lose your job and can’t pay your rent, so you dip into your savings and use the $200 to pay your rent. When that $200 is gone and you can’t pay any longer the landlord come and kicks you out of your house!

You can’t say “but I paid a $800 deposit, can’t you take my rent out of that?” You have to pay the rent above-and-beyond the deposit, just like you have to cover your floating loss in forex above-and-beyond your used margin. :slight_smile:

There are a couple of problems with that School lesson.

First, depending on the broker, the margin will be on the value of the position, not the notional size. By that I mean unless EUR/USD is trading at 1, the 1% margin on a mini contract is going to be something other than $100. At current rates it would be closer to $140, so the spy in question wouldn’t actually be able to do an 80 contract position.

Second, there is a difference between initial and maintenence margin. The 1% is the initial margin. For most brokers the maintenance margin (they may or may not use that specific term) is half the initial margin. That means it would not be a loss of $2001 which triggers a margin call in the example, but a loss of $6001.

We had this same question-and-answer one week ago.

Here’s a link to that thread — 301 Moved Permanently