Understanding contract sizes (lots) is a necessary precursor to understanding the need for high leverage in the Forex market. Each standard lot traded in the Forex market is a $100,000 contract. In other words, when trading one lot in a standard account, a trader is essentially placing a $100,000 trade in the market. Without leverage, most investors would not be able to afford such a transaction. Leverage of 100 - 1 would allow a trader to place the same one lot ($100,000) trade with the post of $1,000 in margin. $100,000 divided by 100 equals $1,000, thus 100 - 1 leverage means that $1,000 of margin is able to control a $100,000 position.
Margin is calculated 2 ways: Used Margin and Free Margin. Used margin is the amount of money used to hold open positions. Free margin is the amount of funds available to place additional positions
As seen in figure 1, $250 is used to hold their current positions, totaling 5 mini lots. $4,736.00 is available for the trader to open additional positions.
Calculating a Margin Call
Because institutions are loaning 99% of the value of a contract to a trader, fail-safes have been put in place to help prevent a trader from going into the negative and owing the institution additional funds. This is commonly referred to as a Margin Call, where typically a client is called upon to send additional funds or the position(s) will be closed at market price. At 50% margin level the trader will be subject to a margin call, the automatic close of open positions so as to bring the margin level back to a suitable percentage.The margin level is calculated by dividing the current equity in an account by the current amount of margin in use (used margin)
After dividing the equity by the margin move the decimal two places to the right. A trader whose equity is at $1,000 and who is using a $500 of margin would divide 1,000 by 500 which of course equals 2. Then move the decimal two places to the right; this trader's current margin level or percentage is thus 200%. At 100% margin level a trader is essentially using their entire available margin. When this level drops to 50% trades will automatically be closed to help ensure that a trader is not subject to losing more money than is held in their account.
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JMI BROKERS LTD is incorporated in St. Vincent & the Grenadines as an International Business Company with the registration number 24975 IBC 2018.
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High Risk Investment Warning: Trading foreign exchange and/or contracts for differences on margin carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss in excess of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. Before deciding to trade the products offered by JMI Brokers you should carefully consider your objectives, financial situation, needs and level of experience. You should be aware of all the risks associated with trading on margin. JMI Brokers provides general advice that does not take into account your objectives, financial situation or needs. The content of this Website must not be construed as personal advice. JMI Brokers recommends you seek advice from a separate financial advisor.
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