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Trading Scenario: Margin Call Level at 100% and No Separate Stop Out Level
Step 1: Deposit Funds Into Trading Account
You start with a trading account balance of $10,000.
Step 2: Calculate Required Margin
You open a long position on the USD/JPY currency pair with 1 standard lot (100,000 units). The required margin for this position is $5,000.
Step 3: Calculate Used Margin
The Used Margin is the margin required to maintain your open position, which is $5,000.
Step 4: Calculate Equity
Your initial account equity is the same as your account balance, which is $10,000.
Step 5: Calculate Free Margin
The Free Margin is the difference between your Equity and your Used Margin.
Free Margin = Equity – Used Margin
Free Margin = $10,000 – $5,000 = $5,000
Step 6: Calculate Margin Level
The Margin Level is the ratio of your Equity to your Used Margin, expressed as a percentage.
Margin Level = (Equity / Used Margin) x 100%
Margin Level = ($10,000 / $5,000) x 100% = 200%
USD/JPY drops 650 pips!
The USD/JPY pair starts to decline, and your floating loss increases to $6,500.
| Used Margin | Floating P/L | Equity | Free Margin | Margin Level |
|---|---|---|---|---|
| $5,000 (unchanged) | -$6,500 | $10,000 – $6,500 = $3,500 | $3,500 – $5,000 = -$1,500 | ($3,500 / $5,000) x 100% = 70% |
Since the Margin Level has dropped below the 100% Margin Call Level set by your broker, you will receive a Margin Call notification.
USD/JPY drops another 300 pips!
The USD/JPY pair continues to move against your position, and your floating loss increases by an additional $3,000.
| Used Margin | Floating P/L | Equity | Free Margin | Margin Level |
|---|---|---|---|---|
| $5,000 (unchanged) | -$6,500 – $3,000 = -$9,500 | $10,000 – $9,500 = $500 | $500 – $5,000 = -$4,500 | ($500 / $5,000) x 100% = 10% |
MARGIN CALL!
At this point, your Margin Level has dropped below the 100% Margin Call Level set by your broker, triggering a Margin Call.
You have a few options to respond to the Margin Call:
- Deposit Additional Funds: You can quickly deposit additional funds into your trading account to bring your Margin Level back above 100%. This would allow you to keep your open position.
- Close the Losing Position: Alternatively, you can choose to close the losing position manually. This would reduce your Used Margin to $0, and your Margin Level would technically be infinite (or undefined), as there would be no open positions.
If you do not take any action to improve your Margin Level, your broker may start liquidating your open positions to bring your Margin Level back above the required threshold. However, in this scenario, your equity remains positive, so your broker should not close your trading account entirely.
It’s important to monitor your Margin Level and take appropriate actions to avoid position liquidation and further losses.
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