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ALL ABOUT MARGIN CALLS AND STOP OUTS

Confused already? No worries, PIGs are patient, and we are here to help.Let's start with the 'Standard'

 mar·gin call

noun

FINANCE a demand by a broker that an investor deposit further cash or securities to cover possible losses.

 

So, a Margin Call, is essentially a warning, a figurative BIG RED BLINKING LIGHT, telling you that your account isn't doing too well, and you are close to having your open positions liquidated at market price, i.e. a Stop Out. 

Now the part where most clients get lost, 'Calculating a Margin Call.' It isn't all that difficult, and once you see it done you should be able to do so on your own.

The basic Formula looks like this:Margin level (%) = Equity / Margin X 100

 

Let's say you have a balance of 10,000 USD, and you open a trade of one (1) lot of USDJPY at 1:100 leverage. This means that you will use up 1,000 USD in margin to hold that position. So, upon opening the trade, your margin percentage is:

10,000 (Your Equity) / 1,000 (The Margin needed to hold the trade) X 100 = 1000%

No issues there... that margin percentage is WELL over the Margin Call threshold of 100%.

HOWEVER, let's now assume that your trade falls 900 pips, leaving your equity at 1,000 USD (900 x 10 USD = a -9000 USD open draw down), that margin equation looks quite different now:

1,000 (Your Equity)  / 1,000(The Margin needed to hold the trade) X 100 = 100%

At this point,  your account is now under a Margin Call Warning.

BUT WAIT, even though most new traders assume this means that their trade may be closed, it actually does not. As we said above it is just a WARNING.

This brings us to the dreaded STOP OUT which is defined as follows:

 

stop out level

noun

FINANCE refers to the point at which all active positions in the forex market are closed automatically by a broker due to a reduction in the trader's margin to levels that can no longer sustain the open position.

 

So, while a Margin Call is just a WARNING, a Stop Out, which happens once the Stop Out Level has been surpassed, is the real deal here, when your open positions will be closed to ensure that you hold enough free margin to maintain them.

At FXPIG the standard stop out level is 50%, note that when you trade on leverage higher than 1:200 this is set to 100% thus making your Margin Call and Stop Out happen at the same time. For all of you on the standard Stop Out Level, here is what that actually means: The percentage relates directly to the required margin, so at 50% your positions will only start to close, with the highest negative positions closing first, once your equity hits 50% of the required margin to hold your open positions. Here is the formula:

 

Stop Out Level = Required Margin X 50%

 

And a quick example: Let's go back to our Margin Call example from above;

HOWEVER, let's now assume that your trade falls 900 pips, leaving your equity at 1,000 USD (900 x 10 USD = a -9000 USD open draw down), that margin equation looks quite different now:

1,000 (Your Equity)  / 1,000 (The Margin needed to hold the trade) X 100 = 100%

At this point,  your account is now under a Margin Call Warning.

 

Now, in order to hit your Stop Out Level here, you would need to loose another 500 USD, or in this example another 50 pips. Losing those 50 pips would then place your equity at 500 USD, and according to the Stop Out Level formula that is minimum required margin to hold that trade. Thus if the trade fell another 0.1 pips that trade would then be closed at market.

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