Very confused about Margin calls. Please help

Beginner Questions
1

I’ve read all the baby pips articles regarding this topic, but my question has not been addressed.

I’ll try to keep it short and sweet.

I’ve been trading with a demo account and turned my $1000 deposit into $24,000 in (on my first try)
Then my demo account expired and I made a new one, and turned $1000 into $31,000 before it expired.

Not once during the process did any of the accounts “blow out”

I’m very confident in my strategy so please don’t start advising me about risk management. I see things completely different as others because to me, when i’m in forex, my only risk is my initial $1000. Any profits I make thereafter I dont mind losing.
If I make $20,000 and I lose it all, I dont care. Even that $1000 can be considered well spent if I lose it because of all the rich information I gained about trading during the last few months. Its all a learning experience to polish and improve my knowledge and strategies at trading.

Anyway; here is the problem I’ve recently come across. When researching brokers, the ones I’m interested in all have margin calls at around 50%-70%.

From what I can understand, this means that if I have $1000 in my account, and I use $200 of it to purchase $20,000 (at 100:1), I will get an automatic stop-loss/margin call if the trade goes against me by $100 (50% of my original margin deposit)

I don’t quite understand the logic behind this. I thought the risk incurred is that of the Trader and not the broker? Why are they managing my account so restrictively?

My strategy involves weathering fairly large drawdowns. Most of the trades I conducted experienced a drawdown of close to 80% of my trade deposit before rallying back and finishing positive.(and i forward tested about 350 trades over the last 3 months). Like i said, I turned $1000 paper money into $45,000 (34000+21000) during realtime demo forward testing.

I didn’t consider those 80% drawdowns that big of a risk because most of the time I was only risking $1000 out of my total equity pool (which later was quite large). The strategy was consistently profitable.
(yes i know that real trading is much more psychologically challenging and I’m hopefully prepared for that. )

But my strategy simply cannot work if my broker is automatically shutting me down every time i’m at a 50% margin level. That seems ludicrous.

I was always operating on the logical assumption that a margin call / freeze occurs when the market is about totally gobble up your entire equity. (ie the pip dollar value of the market going against you is about to be bigger than all the money you have in your account, and so the position is automatically closed and liquidated and your account is “blown out”)

I didn’t for the life of me imagine that if I had a $1000 account, and I use $200 to open a position, that my trade would be automatically shut down as soon as that $200 draws down by 50% to $100

I must be missing something in this picture. Could someone who understands my rambling kindly give me some feedback? Are there reliable brokers (preferably ecn) who don’t have such restrictive margin calls?

2

The 50%-70% figure refers to Maintenance Margin vs Initial Margin.

If the Initial Margin is $200, as you referred to in your example, this means that you must have $200 Initial Margin in your account to open the $20,000 trade you referred to.

After this trade is opened, you must preserve Maintenance Margin of $100 (in the case of the 50% requirement) or $140 (in the case of the 70% requirement), or face a Margin Call.

Let’s walk through a trade:

Your have $1,000 in your account. You open a $20,000 trade. Initial Margin required is $200. Maintenance Margin required is $100 (assuming a 50% maintenance margin percentage).

Your Equity at this point (ignoring the spread) is $800 ($1,000 Balance - $200 Used Margin).

Your trade goes into drawdown, and you have an unrealized loss of $800. But, you are not facing an imminent Margin Call, just yet — because the Margin required in this trade has been reduced from the Initial Margin of $200 to the Maintenance Margin of $100.

Therefore, your account can experience an additional $100 of unrealized loss, before you will face a Margin Call.

If that Margin Call were to occur, your position would be closed, and your account would show the following numbers:

Balance = $100
Open P/L = 0
Closed P/L = -$900
Equity = $100
Used Margin = 0
Usable (available) Margin = $100

3

Thanks for the reply clint.

So what it sounds like is that the margin call is not necessarily to protect the entire account, but simply to protect the “deposit” you left with the broker in order to leverage (ie the original $200).

And so if I find a $100 drawdown too restrictive, I should up my own personal risk by increasing my deposit size to a larger number (eg $500), and then select the lot-size accordingly to hit the original 20,000 units (ie less leverage than when i was using $200).

Am I on the right track?

Also can you elaborate a bit on what exactly that P/L is. Is that a algebraic fraction or simply a trading acronym?

I ask because dukascopy has a margin-call calculator that I was fiddling around with to get a feel how margin call affects me, but I couldn’t input all the data because I wasn’t sure what P/L is.

(I can’t include the link since i’m under 5 posts, but you can google “Margin Level Calculator Dukascopy” and it should be the first link. )

Thanks

4

You can let losses eat up the Equity in your account, but you cannot let losses eat into the Maintenance Margin.

In your example, starting with $1,000, a $200 Initial Margin, and a $100 Maintenance Margin, you can lose $900 of your $1,000 account — but you cannot lose the last $100, because that’s the Maintenance Margin.

I don’t know what you mean.

[B]Your $1,000 account can be drawn down by $900,[/B] before you receive a Margin Call.

It’s an abbreviation for profit/loss, meaning [B]profit OR loss.[/B] (Your broker may use a different term.)

While a trade is open, an unrealized loss in that trade (what you referred to as Drawdown) would be called Open P/L, and it would be a negative number, indicating a loss in an open trade. An open profit would be a positive P/L number.

When a trade has been closed, the Open P/L at the time it was closed becomes Closed P/L, still a negative number, indicating an actual loss booked to the Account Balance.

So, going back to the example in my previous post, before you suffered that Margin Call, you had taken a loss of $900. That is, Open P/L of -$900 (a negative figure) became Closed P/L of -$900 (an actual loss posted to the account Balance).

5

I see, wonderful thanks.

Essentially it seems that for a “50% margin call”, im free to lose as much of my account as i see fit, except [whatever i put up as margin / 2]

So $1000 account, with $200 margin
1000 - (200/2) = $100.
I can lose 900 but before getting a margin call.

With a $40,000 with a margin of $3000,
40,000 - (3000/2) = 38,500
I can lose $38,500 before I receive a margin call

Does leverage come into the equation? (Aside from the fact that it would magnify the pip losses and make it that much easier deplete the account)

6

You seem to be concerned by the fact that you can lose [I][B]almost[/B][/I] all of your account, but there’s always that annoying last 1%, or one-half of 1%, that’s out of your reach. [B]And you’d like to be able to lose that last little bit, as well.[/B]

Here’s your solution: YouTradeFX offers 500:1 leverage and has a [B]ZERO[/B] margin requirement.

That means you can fund a live account with $40,000 (to use one of your examples), you can open a $20 million position (that’s 500 times the size of your account), and you can lose every last dollar of your $40,000 account. How cool is that?

Here’s a copy-and-paste from their website:

Margin: No margin requirements for accounts under $100,000. We feature guaranteed Stop-Loss
meaning that traders cannot lose more than their original investment.

With most brokers, there is an inverse relationship between the [B]maximum allowable leverage[/B] offered to you, and the [B]required (initial) margin[/B] set aside for each trade. That is, required margin = 1 ÷ maximum allowable leverage.

So, to the extent that [I]required margin[/I] limits how much you can lose, this [I]maximum allowable leverage[/I] affects your strategy. However, in the case of YouTradeFX, mentioned above, there is maximum allowable leverage (500:1), but there is no required margin.

The amount of [B]leverage that you actually use[/B] is another matter. As the YouTradeFX example (above) illustrates, if you have the benefit of ZERO required margin, and if you use extreme leverage, you can wipe out every last dollar of your account in record time.

This is a quote from your first post:

As requested, until now I haven’t said anything about risk management. What I’m about to say isn’t meant for you;
you already know all there is to know about risk management.

[B]This is for other newbies who may have stumbled onto this thread.[/B]

There are several well-known trading strategies which generate profits by employing abnormally large position sizes. And there are several well-known trading strategies which generate profits despite regularly experiencing huge drawdowns. The OP on this thread has not detailed his strategy, but it is obviously in the “huge drawdown” category.

Thousands of traders have been attracted to these extreme strategies, and a few of those traders have actually been successful trading them. Typically, the few who have been successful — have been fabulously successful. Which is what attracts all those other traders to these extreme strategies.

For newbies: These extreme stategies are not for you. Not yet, anyway. Learn to trade conservatively. Conservative trading is high-risk enough, at this stage in your trading career. After you get good at conservative trading, if you want to try an extreme strategy (with throw-away money), go for it.

If it takes you years to become a consistently profitable trader, using conservative strategies and conservative money management, consider those years to be the most important part of your forex education. And, after you have become consistently profitable, and after you have graduated from “newbie” status, the extreme strategies will still be around, if and when you decide to take a walk on the wild side.

This thread has focused on margin calls. Newbies should never be concerned with margin calls. If your account is margin-called, you are definitely doing something wrong. I’ve been doing this for 8 years, and I have never faced a margin call. Not even close. Not even during my worst losing periods.

The School of Pipsology stresses proper money management. You should study the lessons in the School, and take proper money management to heart.

Likewise, most of the threads on this forum stress proper money management. This thread is the exception.

7

Are you another banned ex-poster, back here for another windup?!

8

Thanks for the help clint, (and I agree with you for anyone reading this.)

I guess it all depends on how you view things.

I can understand perfectly well why someone who deposits $500,000 or even $10,000 would be wise to play it cautious. (Thats their own personal money, and I too would be obsessive in my risk management) But my deposit will be $1000, and to be honest I just don’t see $1000 lost as that big of a deal. It is a weeks worth of pay for me and I don’t have that many expenses in my life. I can lose $1000 happily if I gain better insight and experience from it.

In addition to that, my mentality is that I dont mind losing my forex profits early on in my forex experimenting. The paper money I make on a demo account is the same as the real money I make in a live account. To me their both money that I did not really work for and so I genuinely view them both as some kind of points system in a educational game im playing.

To most people it may seem utterely bizzare, but the pain felt from losing $40,000 of HARD EARNED money from my job is a completely different issue from losing $40,000 in profits from forex. Later on, should I find a way to be consistently profitable, and gain an deeper understanding of how forex markets really work (this could take years for all I know), then I will be ready to think long and hard about my risk issues.

My move into live-accounts is not really to make money at this stage. I just want to know exactly how different a live account is from a demo-account. So I agree that risk management is extremely important. But for myself I consider my first $1000 deposit as merely an extension of my demo-testing, to work out the kinks. More importantly to satisfyingly answer to myself the all important question “it worked in demo, can it work in live”. And to answer that question, I have no problem if my $1000 grows to $50,000 and then goes all the way back down to $1000 and I lose that initial deposit. I don’t think of it as losing $50,000. I think of it as losing $1000.

[U]As an additional point (perhaps an article suggestion for the eternally useful pipsology)?[/U]

The standard wisdom for forex seems to be

  1. Get knowledge about forex (classes, videos, websites etc)
  2. Develop a strategy or borrow one.
  3. Back-test the strategy on demo account until confident
  4. Forward-test the strategy on demo account until confident
  5. You are now ready to open a live account.

But I think there is still a step missing for new forex traders. Namely information on what to expect in a live account vs a demo account. The only information i’ve come across is warnings about psychology (eg trading real money makes you alter your decision patterns). But I think new forex traders need more comprehensive information than that.

It seems misleading to equate a demo-account with a live account (minus the psychology).

[ul]
[li]Questions like how your position affects the market when during low volume times. Demo obviously does nothing.
[/li][li]Information on issues such as market makers betting against you and sometimes sabotage you in a live account (that’s why I can’t entertain the broker you suggested. I did a lot of research trying to find a trusted ECN, and my choices are limited only to them.)
[/li][li]Questions about slippage differences between real and live accounts. What order delay is normal? What isnt? How will thi affect a scalping strategy? How do features like “slippage control” offered by some brokers translate in real $ lost and gained?
[/li][li]Is there any connectivity differences between live and demo?
[/li][li]The myriad of miscallaenous factors such as margin calls, Roll over fees, etc in during demos.
[/li][/ul]

So many considerations to take into account when planning a strategy during the demo-phase that can’t satisfactory be answered without a deatiled comparison of demo-vs-live (psychology aside)

I hope you understand my viewpoint.
The last thing I wan’t is to mislead or give fellow forex newbies any dangerous ideas. 99.99% of people don’t view things the way I do, and notions of risk do not apply to them.

(Once you’ve read this, just let me know and I will delete my posts and simply leave it as a question about margin call calculation. That way it can be useful to others without having a potentially giving them any bad ideas.)

Thanks for the help with the margin call question by the way.

9

There’s no need to delete anything.

You are perfectly entitled to present your trading ideas on this forum, whether anyone else agrees with you, or not. And that’s what you’ve done. Besides, this is your thread, not mine.

Anyone else, on the other hand, is entitled to disagree with you, and to warn newbies to be careful with the information contained in this thread, if he/she thinks it might mislead them. And that’s what I have done.

So, it’s all good. Nothing should be deleted or edited.

In fact, why don’t you keep this thread going a while longer, by outlining your trading strategy and your trading rules? You have claimed that, by taking huge risks, you have earned huge profits — and there are probably a lot of people here who would like to know how you did that.

10

It’s a bit convoluted so bear with me.

I coded an algorithm that measures the rate of change in price of a currency pair. Nothing fancy just a slope value. I’m sure many indicators have rate of change derivatives built into them in order to graphically depict price changes over time.

My algorithm is straight forward rate of change. I measured all those crazy spikes/dives you see on a chart (I chose 15 minutes) and calculated the average rate of change for a sample size of about 500 of them.

(I’m not talking about any old peaks and valleys. I mean those peaks and valleys that you say to yourself “man I wish I could get in 1 minute before that thing happened” or “man i’m glad I had a stop loss in place”)

Once the average rate of change is detected by the algorithm (and is sustained for 2 minutes, with a narrow +/-), it triggers a beeping sound on my computer.

If im in the room, I immediately place a buy/sell order.

My rule of thumb is;

If I make 50 pips (standard lot size with 2.0 leverage for most of my tests), I immediately end the deal. Regardless of if profits could potentially keep increasing.

And if i lose 100 pips, I immediately close the deal regardless of whether I think there’s a potential reversal in my favor.

How I arrived at these two figures is difficult to explain, and i’m sure they are by no means special.

What is different however is that i’m running counter to the main rule of trading "stop your losses early, let your profits run"
I just dont find this logic very sensible. I just feel its better to to grab up profits early before things go wrong, and give your losses enough breathing room to potentially reverse. Its rare to see a huge spike followed by an even bigger reversal. Most of the time the reversal simply restores the market to similar levels as before the spike and them a rodeo show begins. So if i caught the spike half-way, I need to give myself enough stop-loss space to weather the all-to-common reversal. Most of the time, I barely make 10 pips on the first spike that I catch. The 50 pip profit normally occurs somewhere during the crazyness that ensues after the spike.

Most of the time when those spikes occur on the 15 min, there is a rally in the opposite direction. But it seems that whatever caused the initial spike wins out and theres usually another spike in the original profit direction.

I can never know how long a spike will continue after my algorithm detects 2 minute spike, and I have no way of knowing how big the reversal might be in the opposite direction, or if it will even cover my spread. Inidicators like bollinger and rsa usually go to the dogs during those spikes, so there is no way to predict anything.

But keeping my rule its been working well.

I’ll normally win 17/20 trades, and lose 3. With those 17 wins netting me roughly 850 pips and the losers taking me down 300 pips, for a net profit of 400 pips for every 20 trades.

I think it works because more often than not, it is fairly easy to snatch up those 50 pips even through one or two reversals. And the 100 pip headroom provides enough headroom to let the market bob up and down.

Which is why I was concerned about the margin call issue. I had no idea how that would impact my strategy. My testing has been with 100 pip loss and 50 pip profit. I cannot arbitrarily rework those numbers because of restrictive margin calls. But the way you explained it, it doesn’t seem to be a problem. I can maintain my rules by adjusting my margin to a reasonable level. It will just take longer to see results.

I guess my trading “edge” is my algorithm, strategy, and the fact that I work from home. So i’m near my computer most of the time, and can respond to those rare occasions that big spikes occur. I’ve gone an entire week without getting a single beep. And days where Ill get one every few hours. Major drawback Is i have no way of monitoring multiple charts at the same time. And even if I could, I wouldnt want to. It seems wiser to stick to one currency pair.

I’m no delusional enough to think that a 500 sample size of back testing is statistically significant (especially when the derivatives are taken so crudely). Nor the even more limited forward testing sample size. But I now want to trade live because I still consider it part of testing. I want to know how slippage (which is by definition associated with spikes) will affect my numbers.

11

You lost me somewhere along the line.

You trade with 2.0 leverage (I presume that means 2:1 leverage).

You trade only one currency pair, and you (manually) limit your risk to 100 pips.

If you had one trade open in this pair, your risk would be only 2% of account (± depending on the currency pair).

Plug some numbers into the Position Size Calculator and confirm this for yourself.

So, you would have to suffer nearly 50 losers in a row, to deplete your account down to “margin call” territory.

But, you have said that you win 17 out of 20 trades, on average.

So, how are margin calls even a concern for you?

As I said, you lost me. Please explain.

12

You lost me somewhere along the line.

You trade with 2.0 leverage (I presume that means 2:1 leverage).

Correct

You trade only one currency pair, and you (manually) limit your risk to 100 pips.

Correct

If you had one trade open in this pair, your risk would be only 2% of account (± depending on the currency pair).

No my risk is normally much higher than 2%.

I usually keep it around 20% of my account size.
With a caviat.

I normally start around 10% until I build up my account from $1000 to about $3000. Then I can raise it to 20%

And if lose a trade, I half my risk whatever it is, and can only bring it up back to 20% if build up all the equity I lost on the trade.

These rules have more to do with confidence than any statistical/probability rulesI need to build up some confidence at account start, and I need to regain some confidence after a loss. Its mainly there to keep me from second guessing myself.

The +/- 2 % refers to the slope needed to be detected and sustained for 2 min. Eg -0.8 slope (+/- 2%)

So, how are margin calls even a concern for you?

The concern came in because I thought they were more restrictive than they are. Even on my winners, I have to weather fairly sharp fluctuations. Often I’ll get to a -80 or -90 pip loss before it cycles back to hit my +50 pips exit.

I thought if I put up a $500 margin, the 50% margin call cut would automatically trigger my starting equity went down by $250 (ie 50% of the $500 margin). I didn’t realize it meant I needed to loose all my equity until only $250 was remaining. That shouldnt be a problem. Ill simply adjust my position size so that a 100 pip loss would not bring me anywhere near that.

13

Sorry, but your explanation isn’t making sense to me.

If you open one trade, in a $1,000 account, using 2:1 leverage, then your position size will be approximately 2,000 units of base currency (that is, 2 micro-lots), depending on the currency pair you are trading. For convenience, let’s say that your 2:1 actual leverage corresponds exactly to a 2-micro-lot position.

The value of 1 pip will be approximately $0.10 per pip per micro-lot, again depending on the currency pair you are trading. For convenience, let’s say that it’s exactly $0.10 per pip per micro-lot.

Therefore, each pip of profit or loss in this 2-micro-lot trade will be worth $0.20

100 pips of loss (which represents your risk) will be worth $20.00

[B]That’s your risk: $20.00, which equals 2% of your $1,000 account balance. [/B]

Please show me where 10% - 20% risk comes into this trade.

14

Sorry, i messed up in my earlier response! (did it twice too lol)

2:1 leverage? HELL NO! 2:1 is just my sloppy way of referring to the 1:200 leverage.Not 2:1 or 1:2. That is way too low.

15

Your demo performance is 100% worthless and I can guarantee that you will not achieve it in your live account. So I would be very cautious when you go live as you may have a false sense of knowledge about how to trade. I think demo accounts are the worst thing for new traders and I have seen plenty who did what you did in demo accounts and much more, but once they went live they blew their accounts.

PS: I think Clint has covered this topic and you received a satisfactory answer.

16

People like you are economical genius, advising people to not use a strategy which achives large ROI in a short period of time, criticizing everyone about their profitable strategies, lowering their confidence and hope in forex so the just walk away or be happy making less than 5% ROI each month. And actually this is good for u and me :wink:

17

I have never criticized anyone for having a profitable strategy in a live account which works for them. I don’t lower their confidence, I tell them the truth they don’t want to hear sometimes. Those who want to succeed and need to be realistic, the high failure rate clearly shows that most go about trading in the (same) wrong way.