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What is Forex?
Different retail forex brokers and CFD providers have different margin call policies.
What is Forex?
Some only operate only with Margin Calls, while others define separate Margin Call
and Stop Out Levels. What Is Traded In Forex?
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Let’s say you deposit $10,000 into your trading account. You now have an account
balance of $10,000.
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 need to open the position?
Since our trading account is denominated in USD, we 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
Assuming your trading account is denominated in USD, since the Margin Requirement
is 5%, the Required Margin will be $6,500.
Aside from the trade we just entered, there aren’t any other trades open.
Since we just have a SINGLE position open, the Used Margin will be the same as
Required Margin.
Let’s assume that the price has moved slightly in your favor and your position is now
trading at breakeven.
$10,000 = $10,000 + $0
Now that we know the Equity, we can now calculate the Free Margin:
Now that we know the Equity, we can now calculate the Margin Level:
At this point, this is how your account metrics would look in your trading platform:
– $10,000 – – $10,000 –
Long GBP/USD 100,000 1.30000 1.30000 154% $10,000 $6,500 $3,500 $10,000 $0
Used Margin
Because the exchange rate has changed, the Notional Value of the position has
changed.
Whenever there’s a change in the price for GBP/USD, the Required Margin changes.
With GBP/USD now trading at 1.26000 (instead of 1.30000), let’s see how much
Required Margin is needed to keep the position open.
Since our trading account is denominated in USD, 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.
Previously, 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 position’s Notional Value to decrease.
Notice that because the Notional Value has decreased, so has the Required Margin.
Advertisement Since the Margin Requirement is 5%, the Required Margin will be $6,300.
Previously, the Required Margin was $6,500 (when GBP/USD was trading at 1.30000).
The Used Margin is updated to reflect changes in Required Margin for every position
open.
In this example, since you only have one position open, the Used Margin will be equal
to the new Required Margin.
Floating P/L
Equity
Free Margin
Your trade will still remain open but you will NOT be able 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:
Long GBP/USD 100,000 1.30000 1.30000 154% $10,000 $6,500 $3,500 $10,000 $0
Long GBP/USD 100,000 1.30000 1.26000 95% $6,000 $6,300 $300 $10,000 $4,000
GBP/USD drops another 290 pips!
Used Margin
With GBP/USD now trading at 1.23100 (instead of 1.26000), let’s see how much
Required Margin is needed to keep the position open.
Since our trading account is denominated in USD, 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
Notice that because the Notional Value has decreased, so has the Required Margin.
Advertisement 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.
In this example, since you only 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.
Equity
Free Margin
Margin Level
Account Metrics
This is how your account metrics would look in your trading platform:
Long GBP/USD 100,000 1.30000 1.30000 154% $10,000 $6,500 $3,500 $10,000 $0
Long GBP/USD 100,000 1.30000 1.26000 95% $6,000 $6,300 $300 $10,000 $4,000
Long GBP/USD 100,000 1.3000 1.23100 50% $3,100 $6,155 $3,055 $10,00 $6,900
STOP OUT!
The Stop Out Level is when the Margin Level falls to 50%
At this point, your Margin Level reached the Stop Out Level!
This means that your trade will be automatically closed at market price.
Now that 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.
Let’s see how your trading account changed from start to finish.
Long GBP/USD 100,000 1.30000 1.30000 154% $10,000 $6,500 $3,500 $10,000 $0
Long GBP/USD 100,000 1.30000 1.26000 95% $6,000 $6,300 $300 $10,000 $4,000
Long GBP/USD 100,000 1.3000 1.23100 50% $3,100 $6,155 $3,055 $10,00 $6,900
Before the trade, you had $10,000 in cash. Now you’re left with $3,100!
Some traders suffer a terrible side effect when finding out their trade has been
automatically liquidated.
In the next lesson, we provide a different trading scenario where you try to trade forex
with just $100.
It’s possible to trade with such an amount, but is it advisable? Find out what happened
to the trader who tried.
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Trading Scenario: What Happens If You Trade With Just $100?
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