Understanding Margins

Beginner Questions
1

Hi all

I am having trouble understanding the below in the online baby PIPs course.

I dont get how your account cant get to 0?

For example, you open a forex trading account with a small deposit of $1,000. Your broker offers 100:1 leverage so you open a $100,000 EUR/USD position.

A move of just 100 pips will bring your account to $0! A 100-pip move is equivalent to €1 ! You blew your account with a price move of a single euro. Congrats.

2

For example,
You deposit $1,000 Euros. Broker offers 1:100 leverage.
You want to open a $90,000 EURUSD position.

To initiate that trade, there is something called margin requirement.
There is a formula for calculating margin requirement, which is
Margin = Lot size / Leverage
= 90,000 / 100
= 900
Thus, margin requirement to initiate that $90,000 EURUSD trade is $900 euros.

This $900 Euros will be set aside from your account equity balance. This means you only have $100 Euros remaining from your equity balance to facilitate drawdown. You will only get back that $900 Euros when you closed the EURUSD trade.

Now, Let’s assume the value of 1 pip for opening a
$90,000 EURUSD position to be $9.

Do note that you only have $100 euros for drawdown,
When your trade moves against you by 5 pip, you would have lost
5 x $9 = $45 .

Thus, your remaining available equity balance for drawdown would be
$100 - $45 = $55.

What if your trade moves against you by 11.2 pip instead of 5 pip?
You would have lost
11.2 x $9 = $100.8

Now, in this instance, you would have exceeded your available margin for drawdown.
So what happens?

Different brokers have different margin requirements.
In the most likely scenario, your $90,000 EURUSD trade will be terminated instantly,
and you will get back your $900 euros which was set aside to initiate your trade.

So in summary,

  1. your $90,000 EURUSD trade was closed out due to insufficient margin balance.
  2. your remaining account equity balance would be $900 .

Now, back to your initial question, what if you open a $100,000 EURUSD position?

I’m not really sure if your broker would even allow that to happen in the 1st place.
Margin requirement for opening a $100,000 EURUSD trade position is
Margin = 100,000 / 100
= 1,000

Assuming, your broker allows it. Your remaining margin balance
for drawdown is ZERO. The trade would have to be close out immediately.
A commission fee would probably be deducted from your account equity balance
for initiating that trade.

1 Like
3

Hello SSS38,

I had the same question while reading the course (also a newbie here), so I dug dipper in order to understand the point.

So, the math here is:

EUR/USD

If you have no leverage:
1 pip = 0,0001€
100 pips = 0,01€

If you have 100:1 leverage you have to multiply with the ratio of units leveraged. For instance:
1 pip with leverage equals 0,01€ (0,0001 * 100 leverage ratio)
100 pips with leverage equals 1€ (0,0001 * 100 pips * 100 leverage ratio)

So, let’s set an example, based on the course:

  • You buy EUR/USD at 1,2300 $USD
  • You leverage it to 123.000$ USD with 1.000€ margin (or 1.230$ USD)
  • 100 pip drop - EUR/USD at 1,2200$ USD
  • As you are leveraged, 100 pip drop in reality equals to -1.220$ USD (- 1,2200$ *100)
  • You now have lost your margin (you have 10 bucks left: 1.230 margin - 1,220 from the drop)

I don’t know if I was clear, but please let me know if I can help any further.

4

You can go back to reading the material you might have while taking the course. Clear the basics and then begin with it.