Margin Call Example: With 50% Stop Out Levels
Article 12 from 16
After we know about margin call at level 100% and without a separate stop out level in the previous article (Hopefully you read that, or you’ll regret it!), let’s create another scenario that explains margin call example at level 100%, but with a 50% stop out level.
So, let’s call Sarah again! (Poor Sarah, again)
Let's Dig In!
Meet Sarah, a determined forex trader who created an account with the fictitious brokerage business “ForexPro.” Sarah opted to trade the EUR/USD currency pair after depositing $10,000 into her account. Let’s dig into the calculations:
Step 1: Setting up The Margin Call Level
The margin call level has been set at 100% by ForexPro. Sarah will receive a margin call if her account equity falls below 100% of the utilized margin.
Step 2: Calculating Sarah's Equity
Sarah’s equity is the current worth of her account, including any unrealized profit or loss from open positions. Sarah has no other active trades at the start, therefore her equity is equal to her account amount.
Account Balance = $10,000 Equity.
Step 3: Margin Calculation
The EUR/USD currency pair has a margin requirement of 1% at ForexPro. This means that Sarah must have $1,000 in margin for every $100,000 transacted. Assume Sarah decides to open a trade in the EUR/USD pair worth one standard lot ($100,000).
Margin Required = Position Size / Leverage
= $100,000 / 100 = $1,000.
Step 4: Calculate the Used Margin Percentage
Divide the margin utilized by the equity and multiply by 100 to get the used margin percentage.
Percentage of Used Margin = (Margin Used / Equity) * 100
= ($1,000 / $10,000) * 100 = 10%
Step 5: Checking Margin Call
Sarah’s account is not currently subject to a margin call because the used margin percentage (10%) is less than the margin call level (100%).
Step 6: Stop Out Level
The stop out level has been set at 50% by ForexPro. If Sarah’s utilized margin approaches or falls below 50% of her equity, ForexPro will immediately close out her position(s) to prevent further losses.
Step 7: Checking Stop Out
Sarah’s positions will be immediately liquidated if the used margin % hits or falls below the stop out threshold. In this case, Sarah’s positions are safe from automatic liquidation because the utilized margin percentage is only 10%, which is significantly over the stop out level of 50%.
However, suppose market conditions change and Sarah’s (still feels bad calling out Sarah on this scenario 🙁 ) positions suffer severe losses, causing her equity to fall below the margin call limit.
Assume Sarah’s account equity drops to $1,000 as a result of negative market movements. In this instance:
Percentage of Used Margin = (Margin Used / Equity) * 100
= ($1,000 / $1,000) * 100 = 100%
Now that the utilized margin percentage has reached 100%, ForexPro will send Sarah a margin call message, pushing her to either deposit additional funds or reduce her position size to match the margin requirements and avoid any stop-outs.
REMEMBER!
This is a fictitious margin call example, and actual margin requirements, leverage, and regulations may differ between brokers. To avoid margin calls and potential stop outs, traders should carefully research their broker’s individual margin restrictions and continuously check their account’s balance levels. To preserve trade funds, proper risk management measures must be implemented.
Article Summary
- The article discusses a scenario of a margin call example at level 100% with a 50% stop out level for forex trading.
- Traders will learn a calculation of the Margin Required and Percentage of Usage Margin.
- The margin call level has been set at 100% and the stop out level has been set at 50%.
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