# Margin limit calculation

I am new to the community, and I wish to add a question regarding the margin topic (something that I wonder if i am missing out on).

Let's assume that my broker gave me a 1:10 leverage, and my "Good faith" deposit is only \$2000, which means that I can control up to \$20,000 (right?).

If I were to open a big trade that has a \$10,000 Margin Requirement, does it mean that my available margin is: \$20,000-\$10,000= \$10,000 (right?)

Now, this is were I get a little bit confused, how do you calculate your total margin limit? What happen if the trade that i opened (the one that has a \$10,000 margin requirement) is exceeding my "Good faith deposit" (a draw-down that is greater than my \$2000 deposit)?

Does the broker close the trade? or does my "Free margin" allow the trade to go on? I am risking only 50% of my margin, so does it mean that the margin will allow me to have a draw-down that is greater than \$2000?

I looked over the web and found the formulas to calculate margin requirement, but I am not sure about the issue.

The formulas: Margin= 1/ Leverage

Equity- Equity = Balance + Floating Profit/Loss

Margin level- Margin Level = (Equity / Margin) x 100

Free margin- Free Margin = Equity - Margin

Any help would be very appreciated .

P.s I apologize if my question is not in the right format (I am still learning how to submit questions to the community)

This is exactly how people blow their money with a margin account. What you are essentially doing is overtrading. You are opening an account with only \$2,000 with 10:1 leverage, allowing you to trade with effectively \$20,000.

If you open one trade to the value of \$10,000 then your trade only has to go 20% against you for your account to be wiped out. If the trade goes more than 20% against you, you will end up losing more than your \$2,000 deposit. And yes your broker will probably close the trade.

For starters I think \$2,000 is a bit small to start trading with, you are better off starting with at least \$5,000 and if possible \$10,000. These amounts would allow you to have at least 5 to 10 trades of reasonable size opened at the one time.

You need to position size your trades so that you are not over trading on any one single trade. You should not be risking more than 1% of your account size on each trade. With your leverage your account size is \$20,000, so allowing a risk of 1% on each trade means that you would not be risking more than \$200 on each trade.

Say you were looking to by a share priced at \$10 and you set your initial stop loss at 10% (\$9), so your risk is \$1 per share. You divide that into you maximum individual trade risk of \$200 to get the number of shares you can buy. So \$200/\$1 = 200 shares you can buy for this stock. 200 shares x \$10/share = \$2,000.

This stops you from overtrading on one trade and allows you to trade over a longer period of time. Always plan first before you trade and make sure you manage your risk.

• Thank you for answering, but you didnt answer my question regarding Margin limit calculation, but instead you provide me with "how to trade" insight, which I value, but I asked a hypothetical question, and i didnt say that i was trading this way. also, "You should not be risking more than 1% of your account size on each trade.", I am sorry, but i wasnt asked to be lectured on how to trade. The formula that i posted are for Forex, not shares (stocks), thus the calculation format of margin is different from forex to stocks. Thank you anyway... – Tom Baor Feb 2 '18 at 11:27
• I answered by saying if your trade went against you by 20% you would be wiped out, you can lose more than your \$2000 and the broker would close out your trade. – Victor Feb 2 '18 at 12:08
• How would the calculation (formula) be done? why 20% and not 25% or 19%? – Tom Baor Feb 2 '18 at 12:09
• Because 20% of \$10000 is \$2000, which is the total amount of capital you funded the account with. – Victor Feb 2 '18 at 12:24
• Also, it doesn't matter what you are trading, margin works the same. I used an example with shares because you did not mention what you were trading. – Victor Feb 2 '18 at 12:27