Home Courses Course-01 32 – Complete Summary on Margin Trading

32 – Complete Summary on Margin Trading

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All the concepts and terminologies in a margin account have been discussed in the previous course articles. Now, let us put it all together and understand how it is to trade in a margin account.

In this lesson, we shall go through all the steps (from taking a trade to closing it) so that you can get a clear idea on how all the terms are interrelated.

Example on EUR/USD

Step 1: Balance

To start taking positions in your account, you must first deposit some amount. So, let us say that you have deposited $1,000 in your margin account.

Once this amount is deposited, your Balance will become $1,000.

Step 2: Required Margin

After depositing, if you wish to go long on EUR/USD, you must know the Required Margin to open a position. Assuming the price of EUR/USD is 1.1800, and you want to open 10,000 units, the Required Margin, if the Margin Requirement is 2%, is,

Required Margin = Notional Value x Margin Requirement

In terms of USD, Notional value = 10,000 euros x $1.18000 = $11,800

Hence, the Required Margin will be,

Required Margin = $11,800 x 0.02 (2%)

= $236

Step 3: Used Margin

As discussed, when there is a single position open, the Used Margin will be equal to the Required Margin. So, here, the Used Margin will be $236.

Step 4: Equity

Initially, let us say that your trade is in breakeven (no profit no loss). The Equity for this can be obtained using the formula,

Equity = Balance + Floating P/L

= $1,000 + $0

Hence, Equity = $1,000

Step 5: Free Margin

From Equity and Used Margin, we can calculate the Free Margin as well, by finding the difference between the two.

Free Margin = Equity – Used Margin

= $1,000 – $236

Thus, the Free Margin turns out to be $764.

So, this is the amount you have left to take new positions.

Step 6: Margin Level

Taking another step forward, we can calculate the Margin Level as,

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

= ($1,000 / $236) x 100%

Margin Level = 432%

Hence, the Margin Level is 432%. This is an important term for brokers because they use it to determine the eligibility if you can open new positions or not. That is Margin Call Level and Stop Out Level the by considering the Margin Level.

The values that will be changed after the price changes are

Notional value

Used Margin

Floating P/L

Equity

Free Margin

Margin Level

Now, let’s say the price of the EUR/USD dropped to 1.1000. For this, let us calculate the changes in the values.

Notional value

Notional value = 10,000 euros x $1.1000

Notional value = $11,000

Used Margin

Used Margin = Notional value x Margin Requirement

= $11,000 x 0.02

The Used Margin will be $220.

Floating P/L

Assuming the pip value to be $1, the Floating P/L for a movement of 800 pips will be,

Floating (Unrealized) P/L = (Current price – Entry price) x pip value

= (1.1000 – 1.1800) x 10,000 x $1

= -0.08 x 10,000 x $1

From the above calculation, the Floating P/L will be – $800.

Equity

Similarly, Equity will change to

Equity = Balance + Floating P/L

= $1,000 + (-$800)

Hence, the Equity will be $200.

Free Margin

Free Margin = Equity – Used Margin

= $200 – $220

Free Margin = – $20

Margin Level

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

= ($200 / $220) x 100%

Hence, we obtain the Margin Level to be 90%.

Now, if you recall the previous two lessons, at this point Margin Call will be initiated by the broker. And a further fall could lead to Stop Out as well.

In case if the Margin Call Level is the same as the Stop Out Level, then your Used Margin will be released and the Floating Loss will be realized. Also, your Balance will be updated accordingly. Does it all make sense now? Check your learnings below.

To take a position, what is the most basic requirement?

Correct! Wrong!

Notional value is used to calculate the

Correct! Wrong!

Calculate the Free Margin if the Equity is $1,000 and the Used Margin is $100

Correct! Wrong!

Margin Level, Margin Call Level, and Stop Out Level are closely related.

Correct! Wrong!

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