Skip to content Skip to sidebar Skip to footer

Forex Trading Margin, Leverage and Margin Call

Margin and Leverage The existence of margin and leverage allows us not to need to have a capital of 10,000 Euros to be able to buy the 10,000 Euros, but only with a guaranteed capital of around 100 Euros, we can already transact an amount of 10,000 Euros.

Example: Suppose we want to trade in the USD/JPY currency pair as much as $10,000. In the modern forex market, we do not need to have a capital of $ 10,000 to be able to trade that amount, but it is enough to guarantee a capital of only $100 (with a leverage of 1:100).

Of course, in addition to the capital used as collateral, we still have to leave a margin (as available margin) to withstand losses if the transaction we make turns out to be negative floating. Well, if the open trade has been completed (closed) then the margin (collateral) will be returned to our account again in full.

Forex Trading Margin, Leverage and Margin call

The amount of leverage offered by each broker varies between 1:100 to 1:1,000 Leverage here functions like leverage, which can increase the power of your transactions by about 100x (for 1:100 leverage). So with a margin of $ 200 then you can trade a maximum of $ 200 x 100 = $ 20,000.

How to calculate margin with leverage Example:

leverage 1:100 then means (1/100)x100% = 1%

leverage 1:200 then means (1/200)x100% = 0.5%

leverage 1:500 then means (1/500)x100% = 0.2%

Margin Call Margin call is a condition where our open position is no longer possible to continue because our cash equity is running low (available margin runs out), so we can no longer withstand losses caused by transactions that we do so that the position will be closed automatically by the system. If we experience a Margin Call, it means that the capital in our account is depleted and only "used" used margin remains. Margin Callini can be said to be a nightmare for traders, therefore we need to know the resilience of our margin before opening a position

An example of a margin call calculation is as follows: For example, our initial capital is $1,000 and we have open sell 0.2 lots in GBP/USD with a leverage of 1:500 as in example no.2 above, the margin (collateral) used is $76 (0.2 x 100,000 x 0.2% x 1.9010 = $76). And the remaining balance of your capital (cash equity) after being deducted by the guaranteed margin will be $1000 – $76 = $924 Because we are using 0.2 lots, the value of the movement per pip is $2 and the remaining $924 capital will be able to withstand losses of up to $924 / $2 = 462 points. So if the loss exceeds the resistance (minus 462 points), there will be a Margin Call.