Contract Sizes & Margin Calls

Understanding Contract Sizes

Each standard lot traded in the forex market is a 100,000 unit (of the base currency) contract. In other words, when trading one lot in a standard account, a trader is essentially placing a 100,000 unit trade in the market. Without leverage, many investors would not be able to afford such a transaction. Take the USD/CAD for example: leverage of 50:1 would allow a trader to place the same one lot ($100,000) trade with the post of $2,000 in margin. $100,000 divided by 50 equals $2,000, thus 50:1 leverage means that $200 of margin is able to control a $10,000 contract.

Many retail forex brokers also offer a mini account option. Mini accounts are essentially 10% the value of standard accounts, meaning that mini contracts are 10,000 units (of the base currency). A trade of one mini USD/CAD lot would be a $10,000 trade. Trading with 50:1 leverage would mean that $200 of margin would control a $10,000 contract.

Calculating a Margin Call

Fail-safes have been put in place to help prevent a trader from going into the negative and owing their broker additional funds. This is commonly referred to as a Margin Call. In the Forex market, a margin call typically means that their open positions will be automatically closed. While in other financial markets a client is called upon to send additional funds or the position(s) will be closed at market price.

The margin level is calculated by dividing the current equity in an account by the current amount of margin in use (used margin).

After dividing the equity by the margin move the decimal two places to the right. A trader whose equity is at $1,000 and who is using a $500 of margin would divide 1,000 by 500 which of course equals 2. Then move the decimal two places to the right; this trader's current margin level or percentage is thus 200%. At 100% margin level a trader is essentially using their entire available margin. When the margin level drops to 100%, trades will automatically be closed.