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Chapter 5, Part IV. Spread, Lots, Leverage/margin and profit/loss – joining all... Page 6

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 15, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    ADDITIONAL TALK ABOUT MARGIN

    Pipruit: Let me ask just one question Sir. And what will happen, if the floating loss on my open position will become greater than the margin?​

    Commander in Pips: This is a very important question, Son. Let’s take previous example. As you’ve calculated, we need at least 4083.63$ as initial margin just to open positions. This sum will be locked as soon as we open these positions.

    Now, take carefully follow my thoughts:

    1. If we will transfer as a margin precisely 4083.63$ then our position will be automatically closed if market will move against us by even 1 pip. Because in this case our deposit will become insufficient - less than required minimum margin, estimated by the Broker. So, if your deposit only equals the minimum margin that demanded by the broker, then you can’t hold your positions open if the market moves even 1 pip against you. Here is the major formula for calculation:

    Maximum Floating Loss = Trading account balance – demanded Margin


    What does it mean? Let’s assume that initially you’ve transferred on your trading account $5000 (i.e. your initial trading account balance) and demanded margin by Broker, according to our estimation in previous task – 4083.63. It means that the maximum floating loss, that you can hold prior the mandatory close your positions by the Broker equals:

    5000-4083.63 = $916.37.

    Pipruit: Ok, I understand that. But what is a floating profit or loss?​

    Commander in Pips: Well, all positions that you’ve opened and not close yet are marked – to – market in real time. Broker software automatically recalculates after every quote change current profit or loss on your open trades. Because this profit or loss changes with each quote changing, i.e. price changing, it is called “Float”. Quotes are floating in time, so, the result of open trades follows them.

    Pipruit: And if my loss will become greater, Broker will close all open positions or just some of them? Because if Broker will close some of them, the margin will be partially unlocked and other positions could be financed with it?​

    Commander in Pips: You’re right. For example, if your loss in our example will exceed 916.37$, then Broker could close, for example, just EUR/USD position. Since it demands 1320$ of margin – it will be unlocked and added to your account assets. But what position will be closed and the procedure of mandatory closing of positions is determined by the Broker. Some will close all positions, some will close some positions in a specific order. Some will start closing positions before your available balance reaches zero. So, you have to find out it with scrutiny and all nuances before start trading!

    Pipruit: And what is a trading account balance? Does it always equal to initial transfer?​

    Commander in Pips: Of course not. It changes as the result of your trades. If you make some profit your balance increases with it amount, if you take losses – the balance decreases. For example, your initial deposit transfer was $5000, then you make 1 trade with profit, say $786 and 2 trades with loss, say $120 in each trade. So, your trading balance will be 5000 + 786 – 120 – 120 = $5546.

    Pipruit: Thanks, Commander. I think that everything becomes clear now.​

    Commander in Pips: Sounds good. Take the last task here then.
     
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