Tag: Floating P/L

Categories
Forex Course

34. Refresher – Margin Trading & All The Topics Involved

Introduction

Introduction

Introduction

We have discussed all the terminologies and concepts related to Margin Trading in the previous articles. In this article, let’s get a quick recap of all these terms with the help of examples.

Let’s go through the steps involved in margin trading with the help of these terms. This exercise will help you in understanding how all of these terms are interrelated.

Let’s say Tom wants to margin trade GBP/USD currency pair. Below is the step-by-step procedure that he should follow.

Step 1: Balance

To start taking positions in his margin account, Tom must first deposit some amount. So, let’s say he has deposited $1,000 in his margin account. Once this amount gets deposited, Tom’s Balance will be $1,000.

Step 2: Required Margin

After depositing, if Tom wishes to go long on GBP/USD, he must know the Required Margin to open a position. Assuming the price of GBP/USD is 1.3150, and he wants 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 pounds x $1.3150 = $13,150

Hence, the Required Margin will be,

Required Margin = $13,150 x 0.02 (2%) = $263

Step 3: Used Margin

As we know, when there is only one position open, the Used Margin will be equal to the Required Margin. So, here, the Used Margin of Tom’s margin account will be $263.

Step 4: Equity

Initially, let us say that Tom’s trade is in breakeven (no profit no loss). The Equity for this can be obtained using the below 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. It is the simple difference between the two.

Free Margin = Equity – Used Margin

= $1,000 – $263

Thus, the Free Margin turns out to be $737.

So, this is the amount Tom has 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 / $263) x 100% = 380%

Hence, the Margin Level is 380%. This is an important term for brokers as they use it to determine Tom’s eligibility to take new positions. Because both the Margin Call Level and Stop Out Level fixed by the brokers will be considering the Margin Level of Tom’s Margin Account.

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 GBP/USD dropped to 1.1000. Let us calculate the changes in the values.

Notional value

Notional value = 10,000 pounds x $1.1000

Notional value = $11,000

Used Margin

Used Margin = Notional value x Margin Requirement

= $11,000 x 0.02 = $220.

Floating P/L

(Entry Price = 1.1800)

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 = (–$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 Tom’s Used Margin will be released, and the Floating Loss will be realized. Also, Tom’s Balance will be updated accordingly. We hope it all makes sense now. Check your learning by taking the quiz below.

[wp_quiz id=”51961″]
Categories
Forex Course

32. Understanding Stop Out Level In Margin Trading

Introduction

Introduction

Introduction

In the last lesson, we saw how Margin Level was found to be useful for giving meaning to Margin Call Level. Similar to the previous lesson, in this lesson, we shall be discussing another term that involves the dependency of the Margin Level. This lesson will be dealing with the understanding of what Stop Out Level is and also the implications and consequences of it.

Stop Out Level, and Margin Call Level have almost got the same meaning. There is only a thin line difference between these two. Hence, understanding the Margin Call Level is critical to comprehend Stop Out Level.

What is Stop Out Level?

Stop Out Level is a level that is set by the brokers, which triggers them to take action when the Margin Level falls below this specified level (Stop Out Level). That is, when the Margin Level breaks below the Stop Out Level, the broker forcibly closes some of the trader’s position, usually without their consent. The positions are liquidated because of the unavailability of the margin in the account.

Before the broker closes the positions, the trader is first intimated that their Margin Level has significantly reduced and is at risk. This intimation is called Margin Call. If the Margin Level falls much more than the Margin Call Level and goes below the Stop Out Level, the positions are liquidated. And this process of liquidation is called Stop Out.

The complete flow to Stop Out

If we were to dig deeper, the dependency of Stop Out level drops down to the basic concepts like Balance, Margin, Floating P/L, etc.

For instance, when a trader takes a position, the above terms come into action. If the trade is in profit, the floating P/L increases, and there are no worries about the margin call and stop out as the margin level would be considerably higher than the margin call level and the stop out level. But, if the trade is running in the negative, eyes must be on the margin call level as well as stop out level. Let’s get this point clearer, with an example.

Let’s say a trader has deposited $1000 into his account and has used $200 for taking few positions. Consider the Stop Out Level to be at 20%.

If the trades are running in a loss of$970. The equity for this is calculated as:

Equity = balance + floating P/L = $1,000 + (-$970) = $30

Similarly, the margin level will be,

Margin level = (Equity/used margin) x 100% = ($30 / $200) x 100% = 15%

Now, since the margin level has gone below the stop out level, the positions are scratched off. So, the trader will have booked a loss of $970. And the newly updated balance will be $30.

This brings us to the end of this lesson on Stop Out Level. Also, this completes all the terminologies that are involved in Margin Trading. Take the quiz below and stay tuned to learn a different lesson tomorrow. Cheers!

[wp_quiz id=”51331″]
Categories
Forex Course

31. The Concept Of Margin Call & Margin Call Level

Introduction

Introduction

Introduction

By now, you would have known that risk management is the most crucial factor of consideration while trading in a margin account. The trader is not solely responsible for their risk, but brokers, too, have some features that directly or indirectly try reducing the risk of the traders. In the previous lesson, we understood what margin level was. And in this lesson, we shall be putting more meaning to it by introducing another term which is correlated with margin level. The margin term, which will be discussed in this lesson is ‘Margin Call Level.’ So, without any further talks, let’s get our feet wet with this topic.

Margin Call Level

Margin Call Level, as the name suggests, is a specific level in Margin Level when the broker warns the trader that their positions are at risk. It is a threshold level when the broker alerts the trader that some of their trades can be forced to close.

As mentioned, the Margin Call Level is closely related to Margin Level. Hence, Margin Call Level is expressed in terms of percentage.

Example

Let’s say the Margin Call Level set by the broker is 100%. So, if an account’s Margin Level falls below 100%, then it is said that the account has hit the Margin Call Level.

Margin Call

Margin Call and Margin Call Level is pretty much the same thing. Margin Call is simply a different version of the Margin Call Level. If Margin Call Level is a specific ‘level’ set by the broker, Margin Call is a ‘call’ or ‘notification’ given by the broker. So, when an account’s Margin Level falls below the Margin Call Level, the account holder will receive a call or notification from the broker notifying the same.

This above explanation was the simple exterior working of Margin Call. If we were to see the internal working of it, one would receive a Margin Call when the Equity value becomes less than the Used Margin. That is when the floating loss becomes larger than the Used Margin.

Now, let’s get this concept cemented by considering an example.

Assume that a trader has deposited $1,000 in his account. Also, he went short on EURUSD for 10,000. The required margin for this trade was $300. Considering this to be the only running trade, the Used Margin will be $300 (same as the Required Margin).

Let’s say the trade is performing well, and the current unrealized P/L is $100. The Equity at this point of time will be,

Equity = Account Balance + Floating P/L = $1,000 + $100 = $1,100

Now, since the trade is running in profit, the Margin Level will obviously be above the Margin Call Level.

Later, let’s say the trade is going into the negative to -$700. The Equity now will turn out to be $300 ($1,000 – $700).

With these values, let’s find out the Margin Level.

Margin Level = (Equity / Used Margin) x 100% = ($300 / $300) x 100% = 100%

Assuming that the Margin Call Level set by the broker is 100%, the trader will now receive a Margin Call as the current Margin Level is at 100%.

Now, wondering what will happen if the Margin Level falls significantly below the Margin Call Level? The answer to this shall be discussed in the next lesson. Make sure to take the quiz below before you go.

[wp_quiz id=”51027″]
Categories
Forex Course

30. What Is Margin Level and How Is It Calculated?

Introduction
The margin concepts such as Used margin and Equity have proved to be essential to understand other margin terms. In this lesson, the concept of Margin level too revolves

Introduction
The margin concepts such as Used margin and Equity have proved to be essential to understand other margin terms. In this lesson, the concept of Margin level too revolves

Introduction

The margin concepts such as Used margin and Equity have proved to be essential to understand other margin terms. In this lesson, the concept of Margin level too revolves around the terms Used margin and Equity. Without further discussion, let’s get right into the understanding of the Margin level.

Margin Level

Margi level is the percentage ratio of Equity and Used margin. It is a term whose value is expressed in percentage. Also, the meaning of it is closely related to the Free margin.

The margin level determines if the trader can take new positions or not. It is a comparative factor as it is compared with a level set by the brokers. For easy comprehension, note that higher the margin level, higher is the possibility for the trader to take new positions and vice versa. Knowing the margin level is vital because this value has a relation with a Margin call and Stop out level as well.

Calculating Margin Level

The margin level is the ratio of Equity and Used margin expressed in terms of percentage.

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

Understanding Margin Level

Similar to the Free margin, the Margin level will have no value when there are no positions open. This is simply because there is no margin used. However, when positions are open, the margin level has a non-zero value, which is dependent on the used margin and equity.

As mentioned earlier, the margin level determines if a trader is eligible to take new positions. And this is determined by the level set by the brokers. If the margin level falls below the level set by the brokers, the trader becomes ineligible to take a new position. Usually, the limit set by the brokers is 100%.

Example

Let’s say a trader has deposited $1,000 to their account and has gone long 10,000 units on USD/CAD. Below are the parameters that are to be calculated to determine the margin level:

  • Required margin
  • Used margin
  • Equity
Required Margin

If the margin requirement for this trade is 2%, the required margin will be,

Required margin = Notional value x Margin requirement = $10,000 x 2% = $200

Used Margin

Since there is only one position running, the value of the used margin will be equal to the value of the required margin, i.e., $200

Equity

Assuming the trade is running in a profit of $50, the equity is calculated as follows:

Equity = Account balance + Floating P/L = $1,000 + $50 = $1,050

Now that all the parameters are known, let’s go ahead and calculate the Margin level.

Margin Level

Margin level = (Equity / Used Margin) x 100% = ($1,050 / $200) x 100% = 525%

Now, since the value of the margin level is above 100%, the trader is still eligible to take new positions. This brings us to the end of this lesson on the Margin level. Don’t forget to take the below quiz.

[wp_quiz id=”50755″]
Categories
Forex Course

29. Other Important Margin Trading Terminologies – Free Margin

Introduction
In the previous lesson, the concept of used margin and equity was discussed. Apart from having their importance, these terms prove to be significant to understand other terms as

Introduction
In the previous lesson, the concept of used margin and equity was discussed. Apart from having their importance, these terms prove to be significant to understand other terms as

Introduction

In the previous lesson, the concept of used margin and equity was discussed. Apart from having their importance, these terms prove to be significant to understand other terms as well. And in this lesson, we will be dealing with a term that has a close relation with used margin and equity.

Just to brush things up, the used margin is basically the total amount of money that is used up by the broker for all the positions. In other words, it is simply the sum of the required margin for all the trades. And equity, on the other hand, is the sum of the account balance and the unrealized P/L. Now that these definitions are clear let’s understand what free margin is.

Free Margin

Free margin is the difference between the Equity and the Used margin. That is, Free margin is the amount that is available for the trader to take new positions. It is basically the complemented version of the Used Margin. Used margin is the margin that is locked by the broker for taking positions, while free margin is the margin that can be utilized to open new positions. Free margin is also referred to as available margin, usable margin, and usable maintenance margin.

Calculation of Free Margin

As already mentioned, the Free margin is calculated by finding the difference between Equity and Used margin.

Free Margin = Equity – Used Margin

In the previous lesson, it was discussed that equity changes continuously when any positions are open. Now, since Equity is one of the factors that determine the Free margin, the free margin also keeps constantly changing when positions are running.

So, when a trade is performing well, the floating P/L increases, which in turn increases the Equity as well as the Free margin. And conversely, the Free margin decreases when the floating P/L decreases.

Now that the formula is clear let’s understand it better with some examples.

Let’s say a trader has deposited $1,000 to their account and currently has no positions open yet. So, the account balance at this point would be $1,000. The Equity will be the same as the account balance as the floating P/L is $0. Since no trades are open, there is no margin used. From this, the free margin is calculated as:

Free Margin = Equity + Used Margin = $1,000 + $0 = $1,000

Thus, it can be concluded that Balance, Equity, and Free margin is the same when no positions are open.

Now, let’s say the trader went short 10,000 units on EUR/USD. Consider the required margin to be $150. Also, assume that the trade is running in a profit of $30.

Equity= Account balance + Floating P/L = $1,000 + $30 = $1,030

The used margin will be equal to $150 (required margin) as there is only one position open.

Free margin = Equity – Used margin = $1,030 – $150 = $880

We hope you understood what Free margin refers to in a margin account. In the coming lessons, we will be discussing the Margin level, Margin call level, and Stop out level. Check your learnings by taking up the below quiz.

[wp_quiz id=”50694″]