Pitfalls of Margin Trading

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Blind with desire to shovel up money by speculating on the Forex market, some newbie traders tend to neglect key elements and basics needed to be a success in this complex environment. Such a seemingly simple thing as margin support may happen to turn into a large stumbling-block on the way to sizable profit.

Once you’ve stepped into the market. you’ve set a stone rolling of risky trading with a vague outcome. And you are not expected to ignore even a tiny thing, let alone margin calculation, proven to be of fundamental importance here.

Guest post by FXOpen Forex Broker

Why is margin issue highlighted that much? 

The point is that knowing the ropes of margin calculation you may insure against a number of frustrating things. They can be boiled down to a few most common cases:

–          protect your trading position from unexpected stop-out;

–          avoid dramatic losses;

–          guarantee high quality operation of your Expert Adviser (EA). This is especially important if you need margin calculations to develop an EA of your own.

Let’s focus on the EA, which is commonly known as a ladder strategy program to facilitate trading activity on Forex. It provides an opportunity to launch several processes at a time and be active 24 hours, having control over a number of trades.

As far as EA operation is based on price movement patterns, it should strictly comply with Margin requirements. So, development of EA algorithm requires careful consideration, where Margin Calculation is a priority.

To handle several processes at a time, EA should set the right parameters of the Leverage, monitor the state of the Equity and Free Margin, as well as coordinate its work with the Market moves, avoiding drawdown and undue risks. Otherwise, it will turn out to be inefficient and get you nowhere.

This article will help you take a fresh and a deep look at the concept of margin and calculations behind it. For your attention there will be introduced unique full-fledged margin calculation procedures that could perform well over time.

MT4 Margin Calculation

All the calculations given below suggest the US dollar as a trading account currency.

The following examples illustrates margin calculations for a single trading instrument. Gross margin for the client’s total position will sum up the margin for each separate currency instrument. Pay attention to the size of the leverage, which is 1:100 for all the cases in question.

Let’s consider some examples of margin calculation involving USD as base currency:

USD – base currency (USD/CHF)

Say, a client opens a short position (Sell) of a 3-lot volume (Pic.1):

Pitfalls of Margin Trading USD CHF Image 1

The following formula can be applied to calculate the Margin, required to open a short position (Sell):

Pitfalls of Margin Trading Formula 1

By analogy, we calculate the Margin for a long position (Buy) of a 5-lot volume (Pic.2):

Pitfalls of Margin Trading long position Image 2

Pitfalls of Margin Trading Formula 2

Now, let’s get down to Hedged Margin calculation for locked positions:  a newly opened 3 lot Sell is added up with a 5 lot Buy (Pic.3):

Pitfalls of Margin Trading Hedged Margin Image 3

The Hedged Margin for USD base currency instruments is derived from the maximum margin size of the short (Sell) and long (Buy) positions:

Hedged Mg=Max (Σ (Mg Buy); Σ (Mg Sell))

As Mg Buy total is more than that of Mg Sell in our example (5000 vs. 3000), then:

Hedged Mg = Max (Σ (Mg Buy) = 5000.

The above formulae may be regarded as a solid platform for your trading activity. Make use of it to gain success and high profits.

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5 Comments

  1. Great post for a newbie to forex trading like myself! I’m definitely going to study margin calculations carefully to protect myself as much as possible due to the complicated nature of the beast. Thanks for a good starting point!

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