Brief Explanation About Margin Call
Margin calls will only occur if the amount of equity we have is smaller or equal to the Used Margin (Equity <= Used Margin).
When you are exposed to margin calls, it is certain that you are experiencing a loss.
For more details about margin calls, let’s look at the following illustration.
Let’s say you are a retired person who wants to run a forex trading business earnestly. You then open a standard trading account and start a deposit of $ 100,000.
When you open your account summary, you will see a brief review of Total Equity, Used Margin, and Usable Margin as follows,
Mathematically the calculation formula is as follows,
Equity = Used Margin + Usable Margin
As long as Equity is greater than the Used Margin, your account will never be affected by Margin Call (Equity> Used Margin -> NOT Margin Call) .
And you will be exposed to Margin Call only if the smaller Equity is equal to Used Margin (Equity <= Used Margin -> Margin Call) .
Okay, let’s continue your story with the assumption that a margin of 5% is needed to buy 1 lot of EUR / USD for a standard type account.
So the summary of your account will be – the amount of Equity is fixed at $ 100,000, Used Margin of $ 5000, and Usable Margin will be $ 95,000 – as follows.
If you re-sell 1lot of EUR / USD at the same price when you bought EUR / USD then the amount of your Used Margin will return to 0.00, Usable Margin return is $ 100,000, and Equity does not change to still $ 100,000.
Because you are too sure about the results of your analysis, you add to the amount or volume of trading, which is initially 1 lot to 19 lots, so your Used Margin will be $ 95,000 and Usable Margin will be reduced to $ 5,000 while the Equity is still fixed.
This position is a very frightening position, bro! for more details, please continue reading it …!
Because the movement of 1 Pip for a standard account represents $ 10 then you will get a lot of profits if the movement of EUR / USD prices corresponds to the results of your analysis. If the price moves 50 Pip then you will get a profit of $ 9,500 but the opposite applies too.
That is if it turns out your analysis is wrong then the name of the loss you will get as a result of the consequences. If it turns out the price moves -10 Pip then you will experience a loss of – $ 1,900.
Then when will you be exposed to margin calls? You will be exposed to a margin call if the Equity is smaller than the Used Margin or the loss that you experience is the same as the Usable Margin value of $ 5,000.
Because your Usable Margin remaining is $ 5,000 and your trading volume is 19 lots then you will be exposed to a margin call if the EUR / USD currency pair moves down as much as 26.31 Pip !!!
Because the EUR / USD price movement is very volatile, to move to get 26.31 Pip is definitely very easy, to move is 26.31 Pip it doesn’t take long, maybe just a few minutes, for the EUR / USD currency pair.
This means that you have a very big chance of being affected by margin calls or being affected by losses.
Where is the 26.31 Pip? this value is obtained from the amount of Usable Margin divided by the volume of trading volume by the amount of profit / loss per Pip or if formulated into ($ 5,000 / ($ 10 / Pip x 19)).
If you are exposed to Margin Call, your balance sheet will look like this,
Because you are exposed to Margin Call, you suffer a loss of the Usable Margin amounting to $ 5,000 or 5% of the total initial deposit value, a loss that is very fast, bro !.
And your final balance sheet will look like this,
You don’t need to worry because you still have the next chance to get a profit but don’t forget to apply the name of financial management and risk .