Margin Call Explained
Assume you are a successful retired British spy who now spends his time trading currencies. You open a mini account and deposit $10,000.
When you first login, you will see the $10,000 in the Equity column of your Account Information window.
You will also see that the Used Margin is $0.00 , and that the Usable Margin is $10,000, as pictured below:
Your Usable Margin will always be equal to Equity less Used Margin.
Usable Margin = Equity Used Margin
Therefore it is the Equity, NOT the Balance that is used to determine Usable Margin. Your Equity will also determine if and when a Margin Call is reached.
As long as your Equity is greater than your Used Margin, you will not have Margin Call.
( Equity Used Margin ) = NO MARGIN CALL
As soon as your Equity equals or falls below your Used Margin, you will receive a margin call.
( Equity = Used Margin ) = MARGIN CALL, go back to demo trading
Let s assume your margin requirement is 1%. You buy 1 lot of EUR/USD.
Your Equity remains $10,000. Used Margin is now $100, because the margin required in a mini account is $100 per lot. Usable Margin is now $9,900.
If you were to close out that 1 lot of EUR/USD (by selling it back) at the same price at which you bought it, your Used Margin would go back to $0.00 and your Usable Margin would go back to $10,000. Your Equity would remain unchanged at 10,000.
But instead of closing the 1 lot, you (the adrenaline-junkie, chop-socky retired spy that you are) got extremely confident and bought 79 more lots of EUR/USD for a total of 80 lots of EUR/USD because that s just how you roll.
You will still have the same Equity, but your Used Margin will be $8,000 (80 lots at $100 margin per lot). And your Usable Margin will now only be $2,000, as shown below:
With this insanely risky position on, you will make a ridiculously large profit if EUR/USD rises. But this example does not end with such a fairy tale.
Let us paint a horrific picture of a Margin Call which occurs when EUR/USD falls.
EUR/USD starts to fall. You are long 80 lots, so you will see your Equity fall along with it.
Your Used Margin will remain at $8,000.
Once your equity drops below $8,000, you will have a Margin Call.
This means that some or all of your 80 lot position will immediately be closed at the current market price.
Assuming you bought all 80 lots at the same price, a Margin Call will trigger if your trade moves 25 pips against you.
Humbug! EUR/USD can move that much in its sleep!
How did we come up with 25 pips? Well each pip in a mini lot is worth $1 and you have a position open consisting of 80 freakin mini lots. So
$1/pip X 80 lots = $80/pip
If EUR/USD goes up 1 pip, your equity increases by $80.
If EUR/USD goes down 1 pip, your equity decreases by $80.