In this scenario, with a Margin Call Level at 100% and a Stop Out Level at 50%, when a trader's equity drops to or below 50% of their used margin, the broker forcefully closes positions to limit losses, as the margin call couldn't be met.
Different retail forex brokers and CFD providers have varying margin call policies. Some exclusively employ Margin Calls, while others establish distinct Margin Call and Stop Out Levels.
In the previous lesson, we navigated through a trading scenario involving a broker that relied solely on Margin Calls.
In this lesson, we'll delve into a real-world trading scenario with a broker operating using separate Margin Call and Stop Out Levels.
The broker has designated the Margin Call Level at 100% and the Stop Out Level at 50%.
Let's explore what transpires in your margin account when confronted with a trade gone awry.
Suppose you decide to deposit $10,000 into your trading account. Consequently, your account balance now reads $10,000.
This is how it appears in your trading account:
Suppose you intend to go long on GBP/USD at 1.30000, opening a position of 1 standard lot (100,000 units). The Margin Requirement stands at 5%.
What amount of margin (Required Margin) must you allocate for this trade?
Given that your trading account is denominated in USD, it's essential to convert the GBP value into USD to ascertain the Notional Value of the trade.
Hence, the Notional Value equals $130,000.
Now, we can compute the Required Margin:
Assuming your trading account uses USD as its denomination and given the Margin Requirement of 5%, the Required Margin amounts to $6,500.
With the exception of the trade you've just initiated, no other trades are currently active. Consequently, since you have only one position open, the Used Margin aligns with the Required Margin.
Let's assume that the market has marginally moved in your favor, with your position now trading at the break-even point. This signifies that your Floating P/L remains at $0.
Computing your Equity:
Your account's Equity now stands at $10,000.
With knowledge of your Equity, you can proceed to calculate the Free Margin:
Hence, your Free Margin is $3,500.
Having determined your Equity, it's now possible to calculate the Margin Level:
Your Margin Level registers at 154%.
At this juncture, your trading platform would display your account metrics as follows:
GBP/USD has declined by 400 pips and is currently trading at 1.26000. Let's assess the impact on your account.
You'll observe that the Used Margin has undergone a change. Alterations in the exchange rate necessitate a recalculation of the Required Margin. Whenever there's a fluctuation in the GBP/USD price, the Required Margin adjusts accordingly.
With GBP/USD now trading at 1.26000 (as opposed to 1.30000), let's determine the Required Margin necessary to keep the position open, given that your trading account is in USD denomination.
Consequently, the Notional Value is $126,000.
Previously, the Notional Value stood at $130,000. The decline in GBP/USD signifies a weakening of the GBP. As your account is USD-denominated, this reduction in the Notional Value ensues.
We can now calculate the Required Margin:
It's noteworthy that the decrease in Notional Value has led to a reduction in the Required Margin. With a Margin Requirement of 5%, the Required Margin equals $6,300.
In contrast, it was previously $6,500 when GBP/USD traded at 1.30000. The adjustment in Required Margin applies to all open positions. In this instance, with only one position open, the Used Margin aligns with the new Required Margin.
GBP/USD's decline from 1.30000 to 1.26000, a variance of 400 pips, translates to a Floating Loss of $4,000. Given that you're trading 1 standard lot, each pip movement amounts to $10.
Your Equity now stands at $6,000.
Your Free Margin has contracted to -$300.
The Margin Level has dwindled to 95%.
It's essential to note that the Margin Call Level is triggered when the Margin Level reaches 100%. Given your current Margin Level, a Margin Call is now imminent. It serves as a WARNING that your trade is at risk of being automatically closed. While your trade remains open, you'll be unable to initiate new positions until the Margin Level surpasses 100%.
This is how your account metrics would appear within your trading platform:
GBP/USD has declined by an additional 290 pips and is currently trading at 1.23100. Let's evaluate the impact on your account.
The Used Margin has undergone a change as a result of the shift in exchange rates. Adjustments in the Required Margin are necessary whenever there's a fluctuation in GBP/USD. Given that GBP/USD is now trading at 1.23100 (in contrast to 1.26000), let's determine the Required Margin needed to maintain the open position.
Considering that your trading account is denominated in USD:
This yields a Notional Value of $123,100. The Required Margin can now be calculated as follows:
It's worth noting that the Required Margin has decreased in line with the reduction in Notional Value. Given a Margin Requirement of 5%, the Required Margin now stands at $6,155, whereas it was previously $6,300 when GBP/USD traded at 1.26000. In this example, where only one position is open, the Used Margin aligns with the new Required Margin.
The decline in GBP/USD from 1.30000 to 1.23100, spanning 690 pips, results in a Floating Loss of $6,900. With 1 standard lot being traded, each pip's movement equates to $10.
Your Equity currently amounts to $3,100.
Your Free Margin has now contracted to -$3,055.
The Margin Level has dwindled to 50%.
At this juncture, your Margin Level has dipped below the Stop Out Level!
Here is how your account metrics would be displayed in your trading platform:
The Stop Out Level is triggered when the Margin Level descends to 50%.
At this juncture, your Margin Level has indeed reached the Stop Out Level!
Your trading platform will promptly initiate a Stop Out procedure.
Here's what transpires:
Consequently, your Balance is adjusted to reflect the Realized Loss.
With your account now devoid of active positions and in a "flat" state, your Free Margin, Equity, and Balance assume identical values. As there are no open positions, the display lacks a Margin Level or Floating P/L.
Let's examine how your trading account evolved from inception to conclusion.
Preceding the trade, you possessed $10,000 in cash. However, you now find yourself with $3,100!
This equates to a loss of 69% of your initial capital.
It's worth noting that some traders experience a distressing reaction when they discover that their trade has been automatically liquidated.
In the forthcoming lesson, we'll present a distinct trading scenario in which you attempt to engage in forex trading with a mere $100.
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