Noob question about Margin Call

[StockyGuy]

Sorry about possible simplicity of my question - maths is not my strong suit.

Say I'm with Oanda and have 10k capital, with 50:1 leverage - so can trade $500,000 worth in a single trade. I want to trade EUR/USD. How much should I stake to mean I only get a margin call when the trade goes against me by a full 2 cents? If I trade with all leverage at 500k with 10k capital, will I be margin called before a 2 cent drop in the currency I'm long in??

Kind Regards

 

[debrox]

I'm pretty new too, but I think I know how this would work with an FXCM micro account.

For a 50:1 account, 1k euro/usd lots require $32 in maintenance margin. They take that money and set it aside while you're in your trade. The leftover money, your equity minus the maintenance margin, is called usable margin. If that value hits zero, you get a margin call and all of your trades are closed. So you want enough usable margin to withstand 2 cents (or 200 pip downside). That solution comes from 2 equations, because the more lots you buy, the less usable margin you have AND the more sensitive each pip is to your equity.

Let x be the number of lots you buy.

usable margin = 10000 - 32*x
usable margin >= 200*.1*x

Setting these two equations equal,

10000 - 32x = 20x
10000 = 52x
x = |_10000/52_|=192, note |_ _| is the floor operator

You can buy 192 1k lots or 19 10k lots.

And to answer your last question, if you trade at maximal allowed leverage, your usable margin shrinks to zero. So if the trade goes against you a single pip, you get knocked out of it. You should always have some usable margin left to keep your trades open after reasonable downswings.

 

[StockyGuy]

Thanks very much. It helps a lot. The reason why I've been demo-ing with Oanda tho is no fixed lot size - but your calculation still helpful. On the last paragraph I might've misunderstood, cos if it goes against you a single pip and closes you couldn't even open a position with a 1 pip spread (let alone much higher spread at newsy times) using max leverage - maybe is difference between brokers.

 

[Rhody Trader]

Say I'm with Oanda and have 10k capital, with 50:1 leverage - so can trade $500,000 worth in a single trade. I want to trade EUR/USD. How much should I stake to mean I only get a margin call when the trade goes against me by a full 2 cents? If I trade with all leverage at 500k with 10k capital, will I be margin called before a 2 cent drop in the currency I'm long in??

In EUR/USD (and any other pair where USD is the quote currency), a 1 cent move is worth $0.01 per unit traded (notice I said 1000 units, not $1000, as units are in terms of the base currency). Thus, a 1 cent move (100 pips) when trading a 100,000 unit standard lot is worth $1000. That means a 2 cent move is worth $0.02 per unit traded.

At 50:1, Oanda will do an automatic position closure when your account value drops to half you initial margin requirement. If you havel $10k available for margin, that means you can lose $5000 before getting closed out. That's 250,000 units ($5000 divided by $0.02/unit). If EUR/USD is trading at 1.40, that means you'd be talking about a trade of $350,000 (250,000 x 1.4) in value, with an initial margin requirement of $7000 ($350,000 / 50).

Obviously,a 250,000 unit position means you wouldn't be maxing out your initial margin. If you wanted to do that, you'd trade about 357,000 units (assuming the 1.4 EUR/USD rate). In that case, a 2 cent move would be worth better than $7000, meaning you'd get margin called well before that kind of move happened.

 

[StockyGuy]

Thanks, Rhody. Really appreciate a pro taking time to answer such a question. (I previously listened to the MP3 of an interview you did that's in article section.) I know I should know such stuff before trading, but cynic in me wonders why there's no easy calculator on Oanda saying: if you trade x leverage your position can drop x cents before your position will be closed. I know Oanda say they hedge positions their customers trade but I DO imagine they benefit when a customer "blows up their account" thru using too much leverage to allow for drawdown.

I really want a leverage level such that I can wait for my position to become profitable if I fall foul of a news trade, rather than have to use a stop loss. I suppose good sarcastic response is trade 0 leverage and you'll be fine (and if you're long the higher interest rate currency you can truly wait years if needed). I suppose I have an unhealthy aversion to realising a loss.

 

[anley]

Margin calls are something that 99% of traders, new and old, shoulnd't really need to understand. Why? Because another way of phrasing a margin call is this -

"Your present position(s) has lost so much that if you want to keep it open you're going to have to pay us more money."

Where's the sense in that?

So how to proceed? Simple, never take a position with more than 20:1 leverage. Now, think hard about that because 20:1 is still an incredible amount of leverage, far more than you'll get on most futures such as the eMini and those are volatile enough.

Don't get sucked in by the leverage that the FX boys let you have. That leverage, 100:1, 200:1 and maybe even 500:1 is there for a reason - to give traders as much rope as they need to hang themselves so all their money becomes the brokers........

So no more than 20:1 and if you can't make excellent money on that, then you're 100% going to lose it on anything above 20:1. Want an analogy, when the IRA nearly got Maggie in Brighton their statement was 'we only have to be lucky once, you Maggie have to be lucky all the time'. With 20:1+ margin you also have to be lucky all the time, because the one time you're unlucky, 50%+ of your account is gone in one trade which means you're 100% finished.........

Watch it everyone - realise this is game that's ALWAYS about managing risk first, and potential profits second. The 100:1+ crowd want you to think the oppisite, that it's about profit first, but they only say that so you'll bust out and as I said above, your money becomes theirs......

 

[Rhody Trader]

I know I should know such stuff before trading, but cynic in me wonders why there's no easy calculator on Oanda saying: if you trade x leverage your position can drop x cents before your position will be closed.

There's a profit/loss calculator (under Tools) you can use. It won't solve for X, so to speak, but it lets you see what a move of a certain size will mean for a given-sized position.

 

[StockyGuy]

Thanks, anley and Rhody Trader.

 

[Bint_Crusher]

When margin calls you tell him to fork orf