Excerpt: How bad is forex free margin negative? As a disciplined trader you should never fall in trap of margin negative and here is why.
Forex margin is the amount of money, which is taken as collateral by broker when opening a transaction. It can differ for the same lot size, depending on the leverage, which trader operates with.
What is margin trading
In Forex one standard lot equals 100,000 units of base currency. In other words to open a transaction with 1 lot size, trader must have 100,000 units of the base currency. But many traders and especially beginners do not have such sums of money on their deposits. But margin trading allows traders to open transactions with sizes that far exceed their trading deposits. Thus, in order for a trader to open a position with a large size, broker provide a loan to increase the purchasing power of trader’s account, which is called margin trading.
Dealing with Forex Free Margin Negative
The peculiarity of such a loan is that it can exceed the amount of collateral several tens or even hundreds of times depending on leverage. Leverage in Forex market is the ratio of the trader's funds compared to the size of the broker's credit. Leverage varies depending on brokers and in various types of trading accounts. Standard sizes offered by Forex4You range from 1:10 to 1: 1000 for all types of account except Pro STP. On Pro STP account maximum leverage is limited up to 200. The more leverage trading account has, the less is the amount of funds needed to open a transaction with the same lot size. In addition to balance and equity, most popular trading terminals always display total margin, as well as the amount of free margin and margin level. Monitoring your collateral obligations is no less important than, for example, monitoring your balance or equity. But traders should keep in mind that in case of loss trades, the margin is transferred to the broker as compensation for losses. Margin trading has its advantages and disadvantages.
As a rule, the margin is expressed as a percentage of the total value of the order. There is such a concept as margin level, which is the amount of available margin compared to the level of used margin. The calculation of the margin level is done according to the following formula:
Margin Level = Current Funds / Current Margin * 100.
Free margin refers to the money, which will be used by the trader to open new orders. Based on the margin level of the trader, brokers determine whether the client can open new orders or not.
Traders should keep in mind that if their pending losses exceed margin requirements, free margin can become negative. To avoid such situations, forex brokers use two tools that help to control margin level.
The first tool is MarginCall, which occurs when margin level drops to 100%. This means that a trader can only close positions, lowering the margin, but cannot open new ones.
The second tool is StopOut. When StopOut occurs, the broker automatically closes some of trader’s orders. Forex4You has minimum StopOut level of 10% for Cent and CentNDD accounts, minimum 20% StopOut for Classic, Classic NDD and ProSTP accounts.
It is worth paying attention that if a free margin becomes negative, and then any pending orders will not be executed.