Margin

Whenever you enter a trade, margin is set aside by the broker according to their policies.

There may also be margin calls along the way, and it’s important to understand the margin policies of the broker as each act in different ways when it comes to calculating margins and margin calls.

Once again the margin policies at Forex Place are the most flexible possible, allowing the trader to hold on to existing positions even if his equity level falls below the required margin.

Once again this can best be explained in an example: Let’s say that a broker is offering a 100:1 leverage and the trader has deposited $10,000 as an initial deposit with him.

The trader will be able to open positions of $1,000,000. As can be seen by earlier discussions in “Calculating the value of a Pip or Point” a 100,000 EUR/USD position is worth $10 a pip and a 100,000 AUD/USD position is also worth $10 a pip. However a $1,000,000 maximum position does not equate to 1,000,000 EUR or 1,000,000 AUD.

Assuming the same rates given above:

Instrument Bid Ask

EUR/USD 1.3428 1.3431

AUD/USD 0.8468 0.8472

The maximum position the trader can open in EUR/USD would be:

1,000,000/1.3431= 744,546.20 to the next 10,000 would be 740,000 EUR.

A 740,000 position in EUR/USD is worth 74 USD a pip. The maximum position the trader can open in AUD/USD would be: 1,000,000/0.8472= 1,180,358.83 to the next 10,000 would be 1,180,000 AUD.

A 1,180,000 position in AUD/USD is worth 118 USD a pip. Even though both a 740,000 EUR/USD and a 1,180,000 AUD/USD position require the same margin of 10,000 USD in this case it is clear that both positions are not equal and so should be noted. Even so, some may argue that a 1% move in the EUR/USD will likely move the AUD/USD by approximately 1% also; as can be seen a 1% move in the EUR/USD would be (1.3431*0.01=) 134 pips and a 1% move in AUD/USD would be (0.8472*0.01=) 85 pips and in USD terms 134 pips in EUR/USD would be equivalent to a 85 pip move in AUD/USD.

For example: 740,000*0.0134= USD 9,916 1,180,000*0.0085= USD 10,030. From here we can see that the values are almost identical, this should be noted by the trader as part of managing his risk.

Variation Margin

Variation margin is the amount of profit or loss that may be showing on an open position. In the example taken above lets say the trader opened a position in 740,000 EUR/USD.

Let’s say that the trade goes against the trader by 0.5%, the trader’s account would still have a balance of 10,000 USD however his equity would now only be worth 5,000 USD since he would have accumulated 5,000 USD worth of unrealized losses.

At this point or any other point (according to the broker’s policies) the broker may ask for a margin call, to bring the equity value of the trader back to 1% of the total position. Some brokers increase their margin requirements on weekends, this can sometimes increase margins by 2-3 times and should also be noted by the trader. If a trader receives a margin call on a trade and he does not bring the required margin, he may have his positions hedged or closed out, and he should be aware of this.

As mentioned earlier Forex Place has a set leverage of 300:1 and a margin call at 100% of the margin, however no trade is closed or hedged as long as the trader has equity in his favor. This allows the trader maximum flexibility.