Trading Scenario: Margin Call Level at 100% and Stop Out Level at 50%

Among the thousands of forex brokers available, each handle a Margin Call in different ways. Some brokers consider a Margin Call and Stop Out as just one and the same, meaning they will not send you a warning message, they will only just start closing your trades along with a message notifying you of the action just.

In this lesson, we will go through a real-life trading scenario where you are using a broker that only operates with a Margin Call. Meaning that the broker defines its Margin Call Level at 100% and does not have a separate Stop Out Level.

Here , we will check a real-life trading scenario where the broker operates with a separate Margin Call Level and Stop Out Level. We assume the broker defines the Margin Call Level at 100% and the Stop Out Level at 50%. If that is the case then what happens to your margin account the moment you find you're in trade that goes terribly wrong？ Lets figure out!

Step 1: Deposit Funds into Trading Account

Suppose there is $10,000 in your trading account and set to open trades. The metrics will looks like this:

Step 2: Calculate Required Margin

You want to go long GBP/USD at 1.30000 and want to open 1 standard lot (100,000 units) position. The Margin Requirement is 5%.

How much margin (Required Margin) will you acquire to open the position？

But the account we are trading was denominated in USD, so there is need to convert the value of the GBP to USD to determine the Notional Value of the trade.

£1 = $1.30

£100,000 = $130,000

The Notional Value is $130,000.

We can now calculate the Required Margin as:

Required Margin = Notional Value x Margin Requirement

$6,500 = $130,000 x .05

Imagine your trading account is denominated in USD, since the Margin Requirement is 5%, the Required Margin will be $6,500.

Step 3: Calculate Used Margin

Apart from the trade we just entered, there are no any other trades open. Therefore we will only have a single position open, and the used Margin will be equal as the Required margin.

Step 4: Calculate Equity

Lets assume that the price has slightly moved in your favor and your position is now trading at breakeven. This means that your Floating P/L is $0.

You can calculate your Equity as:

Equity = Balance + Floating Profits (or Losses)

$10,000 = $10,000 + $0

The Equity in your account will be $10,000.

Step 5: Calculate Free Margin

As the Equity is known, we can now calculate the Free Margin as:

Free Margin = Equity - Used Margin

$3,500 = $10,000 - $6,500

The Free Margin is $3,500.

Step 6: Calculate Margin Level

With Equity known we can also calculate the Margin Level:

Margin Level = (Equity / Used Margin) x 100%

154% = ($10,000 / 6,500) x 100%

The Margin Level is 154%.

At this point, this is how your account metrics would look in your trading platform:

GBP/USD falls 400 pips!

GBP/USD falls 400 pips and is now trading at 1.26000. Lets find how your account is affected.

Used Margin

Youll notice that the Used Margin has changed.

Because the exchange rate has changed, you will also experience that change in the Used Margin, and Notional Value of the position has changed. This requires recalculating the Required Margin.

Anytime we see a change in the price for GBP/USD, the Required Margin changes. With GBP/USD now trading at 1.26000 (instead of 1.30000), lets see how much Required Margin is required to keep the position open. But our trading account is denominated in USD, Therefore we need to convert the value of the GBP to USD to determine the Notional Value of the trade.

£1 = $1.26

£100,000 = $126,000

The Notional Value is $126,000.

Heretofore, the Notional Value was $130,000. Since GBP/USD has fallen, this means that GBP has weakened. And since your account is denominated in USD, this causes the positions Notional Value to decrease. We can calculate the Required Margin as:

Required Margin = Notional Value x Margin Requirement

$6300 = $126,000 x .05

Behold that because the Notional Value has decreased, so has the Required Margin. Since the Margin Requirement is 5%, the Required Margin will be $6,300.

And from the past, the Required Margin was $6,500 (when GBP/USD was trading at 1.30000). The Used Margin will be updated to reflect changes in Required Margin for every position open.

And for this example since we have only one position open, the Used Margin will be the same as the Required margin.

Floating P/L

GBP/USD has fallen from 1.30000 to 1.26000, a difference of 400 pips.

But youre trading 1 standard lot, therefore a 1 pip move equals $10. This means that you have a Floating Loss of $4,000.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

-$4,000 = (1.26000 - 1.30000) x 10,000 x $10/pip

Equity

Your Equity is now $6,000.

Equity = Balance + Floating P/L

$6,000 = $10,000 + (-$4,000)

Free Margin

Your Free Margin is now –$300.

Free Margin = Equity - Used Margin

-$300 = $6,000 - $6,300

Margin Level

Your Margin Level has dropped to 95%.

Margin Level = (Equity / Used Margin) x 100%

95% = ($6,000 / $6,300) x 100%

The Margin Call Level is when Margin Level is 100%. Your Margin Level is still now below 100%!

At this point, you will receive a Margin Call! Which is the warning from your broker that your trade is at risk. The trade will still remain open, only that you will not be allowed to open new positions as long unless the Margin Level rises above 100%.

Account Metrics

This is how your account metrics would look in your trading platform:

GBP/USD drops another 290 pips!

GBP/USD falls again, with another 290 pips and is now trading at 1.23100.

Used Margin

With GBP/USD now trading at 1.23100 (instead of 1.26000), lets see how much Required Margin is expected to keep the position open. But our trading account is denominated in USD, so we need to convert the value of the GBP to USD to determine the Notional Value of the trade.

£1 = $1.23100

£100,000 = $123,100

The Notional Value is $123,100.

The Required Margin will be:

Required Margin = Notional Value x Margin Requirement

$6,155 = $123,100 x .05

Remember that because the Notional Value has decreased, so has the Required Margin. Since the Margin Requirement is 5%, the Required Margin will be $6,155.

Previously, the Required Margin was $6,300 (when GBP/USD was trading at 1.26000). The Used Margin is updated to reflect changes in Required Margin for every position open. Same thing here because we have one position open, the Used Margin will be equal to the new Required Margin.

Floating P/L

GBP/USD has now fallen from 1.30000 to 1.23100, a difference of 690 pips.

Since youre trading 1 standard lot, a 1 pip move equals $10. This means that you have a Floating Loss of $6,900.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip

-$6,900 = (1.23100 - 1.30000) x 10,000 x $10/pip

Equity

Now the Equity on your trade is now $3,100.

Equity = Balance + Floating P/L

$3,100 = $10,000 + (-$6,900)

Free Margin

Your Free Margin is now –$3,055.

Free Margin = Equity - Used Margin

-$3,055 = $3,100 - $6,155

Margin Level

Your Margin Level has decreased to 50%.

Margin Level = (Equity / Used Margin) x 100%

50% = ($3,100 / $6,155) x 100%

At this point, your Margin Level is now below the Stop Out Level!

Account Metrics

Below is how your account metrics would looks in your trading platform:

STOP OUT!

The Stop Out Level is when the Margin Level falls to 50%, and At this point, your Margin Level reached the Stop Out Level and your trading platform will automatically execute a Stop Out. This means that your trade will be automatically closed at market price.

• Your Used Margin will be released.

• Your Floating Loss will be realized.

Your Balance will be updated to reflect the Realized Loss. And since your account has no open positions and is “flat”, your Free Margin, Equity, and Balance will be the same. There is no Margin Level or Floating P/L because there are no open positions.

As the trading ends Lets see how your trading account changed from start to finish.

Before the trade, you had $10,000 in cash. Now youre left with $3,100!

Youve lost 69% of your capital.

% Gain/Loss = ((Ending Balance - Starting Balance) / Starting Balance) x 100%

-69% = (($3,100 - $10,000) / $10,000) x 100%

Out of the traders suffer a worse side effect when finding out their trade has been automatically liquidated.

In our next lesson of discuss, we provide a different trading scenario where you try to trade forex with just $100. Even though Its possible to trade with such an amount, but is it advisable？ Find out what happened to the trader who tried.