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Trading Scenario: Margin Call Level at 100% and Stop Out Level at 50%

If you are a forex trader, you have multiple options of strategies to choose from. You can either
operate with only margin calls, or you can opt to separately define the margin call and stop out
levels. This depends on the type of trader you are and what suits you individually. Here, in this
chapter, we will understand the latter strategy when you are trading with an example.
In this case, the broker defines the stop out level at 50% while the margin call is at 100%. First, you
deposit $1000 in your account so your balance would be $1000. Now, you decide to go long on
USD/CHF with a mini lot (10000 units) at the rate of 1.0000. The margin requirement here is 5%
which means that the required margin is $500 at a notional value of $10000. Since this is the only
trade open, your used margin is $500, and the free margin is $500. Now, assume that the trade is at
breakeven, which means that your floating P/L is $0. Since your equity is still $1000, the margin level
turns out to be 200%. Now, assume that the trade falls 500 points to 0.9500. This makes your
floating loss at $500. After this fall, you required margin and notional value changes which means
that the required margin would need to be calculated again. The notional value ends up being
$9500. This means that your required margin is $475. This changes your equity, free margin as well
as margin level. This takes your margin level below 100%. This means that you will receive a warning
call and won't be able to open any new positions till it grows back to above 100%. Now, imagine that
the trade takes a further hit, bringing the margin level below 50%, thus triggering the stop outcall.
This leads to the termination of the deal immediately, and your loss is realised and the trade
released. This will lead to a reduction in your balance.

3 Comments

  1. Susmita on January 8, 2020 at 1:19 AM

    nice

  2. Manjita on January 26, 2020 at 12:49 AM

    Good.

  3. Sabin Khadka on August 6, 2020 at 3:27 AM

    Nice

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