Imagine that you are a retired secret agent who now spends his spare time trading around currencies. You start your first mini account with a balance of $10,000.
At the first screen that pops up after a login, you will see an equity section in the information area.
Understanding Your Usable Margin
You should also notice that your used margin is ‘0’ and your usable is the entire account balance.
The Usable Margin column should always be the equivalent of your total account balance with the Used Margin subtracted.
Usable Margin = Equity – Used Margin
Therefore, it is the Equity and NOT the Balance that is used to determine Usable Margin. Your Equity will also determine if and when a Margin Call is reached.
Your Equity should always be used to determine when a Margin Call has been reached, and your Usable Margin level.
As long as your Equity is greater than your used margin, you will not have margin call.
If you keep your Equity level above your used margin, you will never run into a margin call.
But as soon as your used margin is equal to or greater than your equity, then you will get hit with a margin call.
Assume that your broker requires that you have at least 1% margin per lot. You take out a single lot of JPY/USD.
Your Equity will stay the same at $10,000. Your used margin is bumped up to $100 because you need at least $100 to take a lot out in a mini account. The margin you are allowed to use is now decreased to $9,900.
If you ended up selling your lot back at the exact same price you bought it for, your used margin would drop back down to ‘0’ and your usable margin would be bumped back up to $10,000.
But instead of closing the 1 lot, you (the adrenaline-junkie, chop-socky retired spy that you are) got extremely confident and bought 79 more lots of EUR/USD for a total of 80 lots of EUR/USD because that’s just how you roll.
But, you’re a spy who loves to live life on the edge. Instead of being safe and closing that lot out, you buy an additional 79 more. Now you are in it for 80% of your total bankroll and you would be sweating your head off if you were anyone else.
Your usable margin drops down to $2,000 and your used margin jumps up to $8,000.
If your currency were to increase from here, your profits would be incredible. However, this story has a slightly more depressing ending.
Let us paint a horrific picture of a Margin Call which occurs when EUR/USD falls.
Instead of being greeted with the enormous profits that you were expecting, EUR/USD drops.
You are in it for 80 lots and your equity drops down with your currency.
Your used margin stays the same, but as soon as your equity is below $8,000, you get slapped with a margin call.
If you were able to get all your lots at the same exact price, your account only needs to move 25 pips before you are hit with a call.
If you are unfamiliar with price movements in forex, 25 pips is nothing it all. That kind of movement could happen in mere minutes, and if it went in the wrong direction, you would be out $2,000.
But how did we figure out that you needed a 25 pip movement to stop your account in its tracks?
Every single pip is worth 1$ when it is in a mini lot. You have a total of 80 lots strapped to your account, so each tiny wiggle of the market is worth $80 to you.
Your usable margin is only $2,000 now, and $2,000/$80 is 25.
Your usable margin is now at $0.00 and you are slapped with a margin call!
Anyone with less training than you would be using their computer as a baseball bat at the moment, but you are sitting in the same spot, as cool as the morning dew.
In mere moments, your trading account dropped from $10,000 to $8,000. You blew through 20% of your trading account and you really don’t have much to show for it.
In reality, it’s normal for EUR/USD to move 25 pips in a couple seconds during a major economic data release, and definitely that much within a trading day.
If you were to try this stunt on a day with a major economic release, you could end up losing all of that money in just a few seconds.
I don’t know about you but that would be the fastest I have ever blown through $2,000.
Oh wait… We never included the spread!
We left out the spread to make the information easier to understand. We’ll throw that in now to really horrify you.
The spread for this example is 4 pips. That means that instead of moving 25 pips, JPY/USD only has to move 21 pips!
Let’s say the spread for EUR/USD is 3 pips. This means that EUR/USD really only has to move 22 pips, NOT 25 pips before a margin call.
This is what could happen if you don’t understand the mechanics of margin and how to use leverage.
This type of situation could become a reality if you don’t learn to understand how leverage and margin works.
However, most new traders wouldn’t have even opened a mini account with the recommended amount of $10,000.
With just $1,000 less in your account, your account would only be able to survive a drop of 10 pips!
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