 # Trading Scenario: Margin Call Level at 100% and No Separate Stop Out Level

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n this lesson, we will play out some Margin Call and Stop Out Levels kind of scenarios that can happen in a real-life situation.

Every retail forex broker and CFD provider decides if they want to operate only with Margin Calls or both Margin Calls and Stop Out Levels.

In our case, we will use a broker that only operates with a Margin Call.

The broker’s Margin Call Level is at 100% and there is no Stop Out Level.

Let’s see what will happen when your trades go awfully wrong and you reach Margin Call Level.

This is a classic Margin Call example.

Stage 2: You decide to go long EUR/USD at 1.20000 and want to open a 1 mini lot (10,000 units) position.

Stage 3: You calculate the Required Margin if the Margin Requirement is 2%.

Since EUR is the base currency. This mini lot is 10,000 euros, which means the position’s Notional Value is €10,000.

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

\$1.20 = €1

\$12,000 = €10,000

The Notional Value is \$12,000.

We calculate the Required Margin by the formula:

\$240 = \$12,000 x .02

Assuming your trading account is denominated in USD since the Margin Requirement is 2%, the Required Margin will be \$240.

Stage 4: How much is the Used Margin?

You don’t have any other trades open, so the Used Margin will be the same as Required Margin.

Stage 5: How much is the Equity?

We will suppose that the price has moved slightly in our favor and your position is now trading at breakeven.

This means that your Floating P/L is \$0.

The formula for calculating your Equity:

\$1,000 = \$1,000 + \$0

The Equity in your account is now \$1,000.

Stage 6: How much is the Free Margin?

Now that we know the Equity, we can now calculate the Free Margin:

\$760 = \$1,000 – \$240

The Free Margin is \$760

Stage 7: How much is Margin Level?

Now that we know the Equity, we can now calculate the Margin Level:

417% = (\$1,000 / \$240) x 100%

The Margin Level is 417%.

Then the bad news comes! Germany voted to exit the EU!!!

(Spoiler: It is just a fictional example of a news outbreak, which can affect the euro.)

The price starts to go Against You!

EUR/USD fell 500 pips and is now trading at 1.15000.

You’ll notice that the Used Margin has changed.

Because the exchange rate has changed, the Notional Value of the position has changed.

Whenever there’s a change in the price for EUR/USD, the Required Margin changes.

With EUR/USD now trading at 1.1500 (instead of 1.20000), how much will be the Required Margin in order to keep the position open?

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

\$1.15 = €1

\$11,500 = €10,000

The Notional Value is \$11,500.

Previously, the Notional Value was \$12,000. Since EUR/USD has fallen, this means that EUR has weakened. And since your account is denominated in USD, this causes the position’s Notional Value to decrease.

Now we can calculate the Required Margin:

\$230 = \$11,500 x .02

Notice that because the Notional Value has decreased, so has the Required Margin.

Since the Margin Requirement is 2%, the Required Margin will be \$230.

Previously, the Required Margin was \$240 (when EUR/USD was trading at 1.20000).

The Used Margin is updated to reflect changes in Required Margin for every open position.

In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.

Stage 8: How much will be your current Floating P/L

EUR/USD has fallen from 1.20000 to 1.15000, a difference of 500 pips.

Since you’re trading 1 mini lot, a 1 pip move equals \$1.

This means that you have a Floating Loss of \$500.

Floating P/L = (Current Price – Entry Price) x 10,000 x \$X/pip

-\$500 = (1.1500 – 1.20000) x 10,000 x \$1/pip

Stage 9: How much will be your current Equity?

\$500 = \$1,000 + (-\$500)

Stage 10: How much will be the current Free Margin?

Your Free Margin is now \$270.

\$270 = \$500 – \$230

Stage 11: How much is your Margin Level?

Your Margin Level has decreased to 227%.

217% = (\$500 / \$230) x 100%

Your Margin Level is still above 100% so all is still well.

THE UNBEARABLE HAPPENS: EUR/USD drops another 288 pips!

Price Goes Against You!

EUR/USD fell another 288 pips and is now trading at 1.12120.

Stage 12: How much will be the New Required Margin?

Since our trading account is denominated in USD, we need to convert the value of the EUR to USD to determine the Notional Value of the trade.

\$1.12120 = €1

\$11,212 = €10,000

The Notional Value is \$11,212.

Now we can calculate the Required Margin:

\$224 = \$11,212 x .02

Once again the Notional Value has decreased, so has the Required Margin.

Since the Margin Requirement is 2%, the Required Margin will be \$224.

Previously, the Required Margin was \$230 (when EUR/USD was trading at 1.15000).

The Used Margin is updated to reflect changes in Required Margin for every position open.

In this example, since you only have one position open, the Used Margin will be equal to the new Required Margin.

Stage 13: Calculate your new Floating P/L?

EUR/USD has now fallen from 1.20000 to 1.12120, a difference of 788 pips.

Since you’re trading 1 mini lot, a 1 pip move equals \$1.

This means that you have a Floating Loss of \$788.

Floating P/L = (Current Price – Entry Price) x 10,000 x \$X/pip

-\$788 = (1.12120 – 1.20000) x 10,000 x \$1/pip

Stage 14: How much is the Equity NOW?

\$212 = \$1,000 + (-\$788)

Stage 15: Calculate your Free Margin at the moment

Your Free Margin is now –\$2.

-\$12 = \$212 – \$224

Stage 16: Calculate your Margin Level

Your Margin Level has decreased to 99%.

95% = (\$212 / \$234) x 100%

At this point,  your Margin Level is now below the Margin Call Level!

SORRY, BUT YOU GET A MARGIN CALL!

1. Your Used Margin will be “released”.
2. Your Floating Loss will be “realized”.
3. Your Balance will be updated to reflect the Realized Loss.

Now that your account has no open positions and is “flat”, your Free Margin, Equity, and Balance will be the same.

There is no Margin Level or Floating P/L because there are no open positions.

Let’s see how you started in the beginning and what is the real situation now.

Before the trade, you had \$1,000 in cash. Now you’re left with \$212!

You’ve lost 79% of your capital.

-79% = ((\$212 – \$1,000) / \$1,000) x 100%

Be careful if you easily faint! This is a possible side effect when your trade goes terribly wrong!

You have to be prepared for all versions of liquidation, so we will look at the case where your broker has a separate Margin Call AND Stop Out Level in our next lesson.

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#### How to Open a Forex Trading Account

NOTE: It should NOT be assumed that the materials presented in Nuubie (the methods, the articles, the techniques, or indicators) will be profitable, or that they will not result in losses. Any reliance you place on such material is therefore strictly at your own risk.
Risk Warning: Trading in CFD’s on Leverage involves substantial risk of loss to your capital, they are complex products and are not for everyone. Between 74-89% of retail investors lose money when trading CFD’s. Trade with caution. 