How to calculate your margin

No matter what instrument you trade, risk management is very important, especially for traders who use margin products such as foreign exchange. Margin trading makes it possible for traders to achieve greater potential profits, but it also carries the risk of greater losses. For some leveraged products, potential losses are not limited to cash in the margin account, and if significant losses occur, the lost funds may also include margin calls.

existforeign exchange marketIn this case, it is impossible for the client to lose more than the margin deposited. The broker-dealer automatically liquidates the client's position almost immediately as soon as the margin call is triggered. Therefore, foreign exchange clients are rarely at risk of having a negative balance in their account.

Most forex brokerage brokers offer very high leverage, so a deposit of $1,000 allows the trader to control a larger amount of money. However, this is also the danger of this approach, where even a move of a few points in the opposite direction of the trader's bet can trigger major losses or even trigger margin calls.

This controlled analysis of a trader's speculative money prevents the trader from losing all his money in a series of bad trades, regardless of his leverage. It also allows traders to take advantage of potentially profitable strategies without having to worry about setting fixed stop-loss orders. This leads to the next problem.

For many traders, this concept of risk management and not using excessive leverage in their accounts is still not well understood. We will provide some figures and an exercise to calculate the available margin based on leverage, hoping this will give you a better understanding of these concepts.

Let's say your account balance is $10,000 and the maximum available leverage is 200:1. No positions were opened at the start and the available margin is 100%.

You decide to create a trade with 2% of the available margin. Now, no matter how many points you think you can profit from the trade, let's say you've decided to enter with 2% margin - that's the amount of margin you'll use.

No matter how attractive a deal looks and how great the potential for return is, you must be disciplined and use only a certain amount of capital.

Here's how you determine the value of a 2% margin trade:

Available Margin: $5000

Used margin 2%

5000 X 0.02 = 100 USD

With 200:1 leverage, a $100 trade is worth $2 per pip. Because 200 times $100 is $20,000, equals 2 mini lots, and each pip is worth about $2.

Therefore, after the transaction is executed, your account will display:DBG Forex

Balance of $5000

Available margin of $4894 ($5000-106, used margin of $100, each pip worth $2 case 3 pip spread = $6)

Margin used: 2.1% (after taking into account the spread factor)

Admission price: 1.3790

The market moved 20 pips in the opposite direction of your prediction and is now at 1.3770. The market should pay attention to the change in the margin used ratio when you are unfavorable:

Available Margin $4854

Margin used: 3.0% (4854-5000 = $146 → 146/4854 = 3.0%)

The exchange rate has again moved 30 pips in the opposite direction of your bet and is now at 1.3740. Used margin and available margin have moved again,

Available Margin 4794 (30 pips down = $60 → 60 - 4,854 = $4,794 if each pip is worth $2)

Margin used 4.3% (4.794 - 5.000 = 206 → 206/4.794 = 4.3%)

Available margin ratio 95.7% (100-4.3 = 95.7%)

This is basically how you calculate and determine the margin used, the margin available, and your risk exposure in the market. Another key factor is to understand how far the market moves in the opposite direction of your bet will blow your position.

Continue this exercise...

Available margin $4794

Transactions: 2

Each pip is worth $4 ($100 with 200x leverage, 2 trades = each pip is worth $4)

Margin used 4.3%

Available margin ratio 95.7%

With an available margin of $4,794 and a pip value of $4 per move, a market move of 1,198 pips in the opposite direction you predicted would trigger a margin call.

$4,794/$4 per point = 1,198 points ($4 x 1,198 = 4,792 points)

This means that an exchange rate reaching 1.2542 will trigger a margin call: (1.3740 - 1198 pips = 1.2542)

As long as you don't use too much leverage, you can withstand the water level falling.

In addition, as a risk and capital manager, you must understand these simple fundamental calculations.

In this example, you use 200:1 leverage. Does that mean you can take more risk because you use leverage? Absolutely not, it means you can take a proportionately smaller risk and get the same return.

Never let your margin drop below the threshold required by your broker. Always monitor the margin situation when you create a trade. At some brokers, margin calls will be triggered when your margin drops below 30%, while others require 20%. Know your broker's requirements.