To trade efficiently in the forex market you must always keep check on the margin requirements. In order to understand it, let’s go through the formulas to calculate margin, margin level, equity and free margin, then we will also look at margin call and stop out levels.
For example, you want to trade 1 lot (€100,000) of the EUR/USD pair at the current exchange rate of 1.09777 (€1=$1.09777), this means you want to buy €100,000 against USD. If your leverage is 200:1 and balance is $10,000, then:
100,000 / 200 * 1.09777 = $548.89 (rounded)
If you open a trade in line with the above-mentioned example, $548.89 will be locked as margin. Your balance remains at $10,000, and values of equity, free margin changes according to the profit/loss.
For example, if the floating P/L is -$101 and the commission is $7, then:
Equity = $10,000 - $101 - $7 = $9,892
For example, if the equity is $9,892 and the required margin is $548.89, then:
$9,892 - $548.89 = $9,343.12 (rounded)
For example, if the equity is $9,892 and the margin is $548.89, then:
$9,892 / $548.89 *100 = 1802.20% (rounded)
Margin level is significant and traders should always keep a close eye on it to avoid closing of positions. Forex brokers use the margin level in determining the margin call Level and stop out Level.
Margin call level
Margin call is the margin level limit set by forex brokers (usually 100%) to determine whether a new position can be opened in the account or not. This means when the margin level reaches or drops below 100%, no new positions can be opened and only existing positions can be closed.
If your account equity keeps dropping and the margin level decreases significantly, the margin call at 100% comes into the picture. It is when Titan FX sends an email informing the customer about the margin call so that the open positions can be managed and closure of positions due to stop out level can be avoided.
Stop out level
Stop out level is the margin level limit set by forex brokers.
At Titan FX the stop out level is set as = <20%.
In case the margin level drops drastically and reaches the stop out level at 20%, the biggest losing position in the account will be closed automatically.
Required margin for commodities such as gold
The formula used to calculate margin remains the same, but you need to have proper trade size value depending upon the commodity.
For example, if you want to trade 2 lots of Gold (200 Oz since 1 lot is 100 Oz) at $1180.68 (exchange rate), and your account leverage is 400:1
required margin: 200 / 400 * 1180.68 = $590.34