After discussing the pitfalls of margin trading, we hereby present a new piece for your attention – margin calculations based on USD as quote currency.
The article is supported by the elaborate formulas. visual images and examples to ease the perception of the presented information.
Guest post by FXOpen Forex Broker
USD – quote currency (EURUSD)
Say, a client opens a short position (Sell) of a 3-lot volume (Pic.1):
Margin for the Sell position is calculated by instrument’s Bid price the moment the order is executed*, that is:
Volume – the volume of the given short position in lots;
Lot Size – the amount of the base currency per lot;
Open Price Bid – trading instrument’s Bid price at the moment of order execution;
Leverage – credit help provided to the client (1:100).
So, in our case:
Now, let’s analyze an example of margin calculation, required to open a long position (Buy) of a 5-lot volume (Pic. 2):
Margin for the Buy position is calculated by instrument’s Ask price the moment the order is executed*, that is:
Let’s pass to the calculation procedure of Hedged Margin for locked positions.
To this end, a newly opened 3 lot Sell is added up with a 5 lot Buy (Pic.3):
The following steps are required to calculate the Hedged Margin:
i) Weighted Average Price (WAP) is derived from all the short (Sell) and long (Buy) positions, opened by a client:
ii) Hedged Margin is calculated by the maximum sum of the Sell and Buy volumes and WAP:
*Processing of orders for new positions
When a client’s order to open a new position reaches the server, an automatic verification of a trading account is carried out to calculate Free Margin for the applied position:
a) the list of open positions is added up with a new one;
b) a new size of the required margin «New Margin» is defined for the client’s total trades, including a new position, added nominally at current market prices during the verification procedure;
c) a floating profit/loss is calculated at current market prices for all the open trades, including a newly opened nominal position;
d) a new size of Free Margin is derived from the formula Free Margin = Equity – New Margin;
e) in case:
– «Free Margin» ≥ 0, a position shall be opened, which is registered in the server log-file;
– «Free Margin» ≤ 0, a position shall be removed, which is registered in the server log-file.
Note! Due to high market volatility, the price at the moment of the trading account verification for the compliance with Free Margin conditions may differ from the price at the moment of order execution (exercise price).
Thus, the exercise price is used to calculate Margin for open positions in similar situations.