What happens if you start a trading account with only $100?

Or €100? Or £100?

Because margin trading allows you to open transactions with a small amount of money, you can surely begin trading forex with a $100 deposit.

But should you?

Let’s see what happens if you do that.

Your retail forex broker has a Margin Call Level of 100% and a Stop Out Level of 20% in this trading situation.

Now that we know what the Margin Call and Stop Out Levels are, let’s see if we can trade with $100.

## Step 1: Deposit Funds into Trading Account

You deposit $100 into your trading account because you’re a big baller shot caller.

You now have a $100 account balance.

This is how it would appear in your trading account:

Long / Short | FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |

– | $100 | – | $100 | $100 | – |

## Step 2: Calculate Required Margin

You wish to short EUR/USD at 1.20000 and open a position of 5 micro lots (1,000 units x 5). The required margin is 1%.

How much margin will you need to open the position (“Required Margin”)?

Because our trading account is in USD, we must convert the EUR to USD to get the Notional Value of the trade.

€1 = $1.20 €1,000 x 5 micro lots = €5,000 €5,000 = $6,000

The Notional Value is $6,000.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement $60 = $6,000 x .01

Since the Margin Requirement is 1% and your trading account is denominated in USD, the Required Margin will be $60.

## Step 3: Calculate Used Margin

There are no other trades open than the one we just entered.

Because we only have ONE position open, the Used Margin will be the same as the Required Margin.

## Step 4: Calculate Equity

Assume the price has shifted marginally in your favor and your position is now at breakeven.

This means your Floating P/L is zero.

Let’s figure out your equity:

Equity = Balance + Floating Profits (or Losses) $100 = $100 + $0 The Equity in your account is now $100.

## Step 5: Calculate Free Margin

We can calculate the Free Margin now that we know the Equity:

Free Margin = Equity - Used Margin $40 = $100 - $60 The Free Margin is $40.

## Step 6: Calculate Margin Level

We can determine the Margin Level now that we know the Equity:

Margin Level = (Equity / Used Margin) x 100% 167% = ($100 / 60) x 100% The Margin Level is 167%.

At this stage, your trading platform’s account stats might look like this:

Long / Short | FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |

– | $100 | – | – | $100 | – | |||||

Short | EUR/USD | 6,000 | 1.20000 | 1.20000 | 167% | $100 | $60 | $40 | $100 | $0 |

## EUR/USD rises 80 pips

The EUR/USD pair has gained 80 pips and is now trading at 1.2080.

## Used Margin

You’ll note that the Used Margin has altered.

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

This necessitates a recalculation of the Required Margin.

The Required Margin fluctuates whenever the price of EUR/USD changes!

Let’s check how much Required Margin is required to keep the position open now that the EUR/USD is trading at 1.20800 (rather than 1.20000).

Because our trading account is in USD, we must convert the EUR to USD to get the Notional Value of the trade.

€1 = $1.2080 €1,000 x 5 micro lots = €5,000 €5,000 = $6,040

The Notional Value is **$6,040.**

The Notional Value was formerly set at $6,000. Because EUR/USD has risen, the EUR has strengthened. Because your account is denominated in USD, this raises the position’s Notional Value.

We can now compute the Required Margin:

Required Margin = Notional Value x Margin Requirement $60.40 = $6,040 x .01

The Required Margin has increased as the Notional Value has increased.

Because the required margin is 1%, the required margin is $60.40.

Previously, the Required Margin was $60.00 (when the EUR/USD exchange rate was 1.20000).

For each open position, the Used Margin is modified to reflect changes in the Required Margin.

Because you only have one position open in this case, the Used Margin will be equal to the new Required Margin.

## Floating P/L

EUR/USD has increased by 80 pips from 1.20000 to 1.2080.

Because you’re trading micro lots, a 1 pip move is worth $0.10 per micro lot.

Your position is 5 micro lots, and a one-point move equals $0.50.

Because you are short EUR/USD, you have a Floating Loss of $40.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip $40 = (1.2080 - 1.20000) x 10,000 x $0.50/pip

## Equity

Your Equity is now $60.

Equity = Balance + Floating P/L $60 = $100 + (-$40)

## Free Margin

Your Free Margin is now **$0**.

Free Margin = Equity - Used Margin -$0.40 = $60 - $60.40

## Margin Level

Your Margin Level has decreased to **99%**.

Margin Level = (Equity / Used Margin) x 100% 99% = ($60/ $60.40) x 100% The Margin Call Level is when Margin Level is 100%. Your Margin Level is still now below 100%!

At this moment, you will receive a WARNING Margin Call.

However, your positions will remain open…

You will be unable to initiate new trades until the Margin Level exceeds 100%.

## Account Metrics

This is how your account metrics would look in your trading platform:

Long / Short | FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |

– | $100 | – | $100 | $100 | – | |||||

Short | EUR/USD | 5,000 | 1.20000 | 1.20000 | 167% | $100 | $60 | $40 | $100 | $0 |

Short | EUR/USD | 5,000 | 1.20000 | 1.2080 | 99% | $60 | $60.40 | -$0.40 | $100 | -$40 |

## EUR/USD rises another 96 pips

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus EUR/USD gains 96 pips and is now trading at 1.2176.leo.

## Used Margin

Let’s check how much Required Margin is required to keep the position open now that the EUR/USD is trading at 1.21760 (rather than 1.20800).

Because our trading account is in USD, we must convert the EUR to USD to get the Notional Value of the trade.

€1 = $1.21760 €1,000 x 5 micro lots = €5,000 €5,000 = $6,088

The Notional Value is $6,088.

Now we can calculate the Required Margin:

Required Margin = Notional Value x Margin Requirement $60.88 = $6,080 x .01

The Required Margin has increased as the Notional Value has increased. Because the required margin is 1%, the required margin is $60.88.

Previously, the Required Margin was $60.40 (when the EUR/USD exchange rate was 1.20800).

For each open position, the Used Margin is modified to reflect changes in the Required Margin.

Because you only have one position open in this case, the Used Margin will be equal to the new Required Margin.

## Floating P/L

EUR/USD has now risen from 1.20000 to 1.217600, a 176-pip difference.

Because you’re trading 5 micro lots, a one-pip movement equals $0.50.

As a result of your short position, you have a Floating Loss of $88.

Floating P/L = (Current Price - Entry Price) x 10,000 x $X/pip -$88 = (1.21760 - 1.20000) x 10,000 x $0.50/pip

## Equity

Your Equity is now **$12**.

Equity = Balance + Floating P/L $12 = $100 + (-$88)

## Free Margin

Your Free Margin is now –$48.88.

Free Margin = Equity - Used Margin -$48.88 = $12 - $60.88

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

## Account Metrics

This is how your account metrics would look in your trading platform:

Long / Short | FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |

– | $100 | – | $100 | $100 | – | |||||

Short | EUR/USD | 5,000 | 1.20000 | 1.20000 | 167% | $100 | $60 | $40 | $100 | $0 |

Short | EUR/USD | 5,000 | 1.20000 | 1.20800 | 99% | $60 | $60.40 | -$0.40 | $100 | -$40 |

Short | EUR/USD | 5,000 | 1.20000 | 1.21760 | 20% | $12 | $60.88 | -$48.88 | $100 | -$88 |

## Stop Out

When the Margin Level falls below 20%, the Stop Out Level is reached. Your Margin Level has now surpassed the Stop Out Level! Your trading platform will execute a Stop Out automatically.

This indicates that your trade will be closed automatically at the market price, and two things will happen:

- 1. Your Used Margin will be “released”.
- 2. Your Floating Loss will be “realized”.
- The Realized Loss will be reflected in your Balance.
- Your Free Margin, Equity, and Balance will all be the same now that your account has no open positions and is “flat.”
- Because there are no open positions, there is no Margin Level or Floating P/L.

Let’s take a look at how your trading account changed from beginning to end.

Long / Short | FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |

– | $100 | – | $10,000 | $100 | – | |||||

Short | EUR/USD | 5,000 | 1.20000 | 1.20000 | 167% | $100 | $60 | $40 | $100 | $0 |

Short | EUR/USD | 5,000 | 1.20000 | 1.20800 | 99% | $60 | $60.40 | -$0.40 | $100 | -$40 |

Short | EUR/USD | 5,000 | 1.20000 | 1.21760 | 20% | $12 | $60.88 | -$48.88 | $100 | -$88 |

– | $12 | – | $12 | $12 | – |

You had $100 in cash before to the trade.

% Gain/Loss = ((Ending Balance - Starting Balance) / Starting Balance) x 100% -88% = (($12 - $100) / $100) x 100%

And with EUR/USD only moving 176 pips!

Moving 176 pips is insignificant. That much movement in EUR/USD can happen in a day or two. Congratulations! You just blew your entire account!

Your trading account is effectively dead because your account balance is insufficient to open fresh deals.