Unlike many other financial markets, where your deposit must fully comply with your trading volume, only a part of it is required in the forex market. The remaining amount will be provided by the broker. Example: You decide to purchase a lot (100 thousand units of the base currency) for the EUR / USD pair. You have been given the opportunity of margin trading with a leverage of 1: 500, which means that in order to buy 100 thousand euros, that is, one standard lot, you only need 200 euros (100 000/500 = 200), and the rest of the amount will pay for you broker. It is worth noting that if the transaction leads to losses, you will never become a debtor of the broker, since the loss-making transaction will automatically close when your deposit is exhausted.
Margin calls are the worst enemies of all traders. Unfortunately, investors quite often find themselves on the threshold of this unpleasant system message. This happens due to lack of experience and non-compliance with elementary risk management.
Margin calls occur when the account balance drops below a certain level, preventing you from opening at least one position, for example, $ 200 when using a shoulder of 1: 500 or $ 1000 when using a shoulder of 1: 100 for one standard lot.
In order to prevent the trader’s losses from exceeding the size of the margin and the available funds on the trading account, the broker establishes a critical level of losses based on the parameter described above. Thus, it is possible to maintain a positive balance on the account.
So how do you calculate margin (collateral)?
Brokers calculate this value automatically, but we believe it will not be superfluous to be able to do this on their own.
Calculation for direct quotes (dollar / quote currency):
Margin: transaction volume / leverage / quotation.
Suppose using a leverage of 1: 100, we buy 1 lot of USDCHF at a price of 0.9330, that is, we buy 100,000 USD for 93,300 Swiss francs, and the margin is 1,000 dollars (100,000/100). Undoubtedly, the best way to understand the essence and causes of a margin call is to meet him. It is not necessary to consciously go to him, since we modeled this situation especially for you.
Mr. Ulman opened an account for trading in the Forex market, deciding to start with an initial deposit of $ 4,000. Due to the fact known only to him, he bought two lots of EUR / USD, when the quotes were at the level of 1.2000. Considering that Ulman uses a leverage of 1: 100, this transaction required a margin security of $ 2,400 (200,000 / 100 * 1,2000). After the opening of the transaction, Ulman closed the trading platform and engaged in everyday affairs. So the day passed.
Waking up the next morning, Ulman decided to check how things were going on his trading account. Ulman opened a trading terminal and – damn it! EUR fell by more than 200 points. When he “entered” the market by buying two lots of European currency, his margin was $ 2,400, therefore, $ 1,600 was left in his spare cash. 200 points of a downward movement on a two-lot transaction worth $ 4,000. That night, the euro fell by 215 points, leaving the broker with no other solution than to forcibly close positions.