Contracts & Margin

Understanding Contract Sizes
Each standard lot traded in the forex market is a 100,000 (of the base currency) contract. In other words, when trading one lot in a standard account, a trader is essentially placing a 100,000 units trade in the market.

Without leverage, many investors would not be able to afford such a transaction. Leverage of 100:1 allows a trader to place the same one lot (100,000 units) trade with only 1,000 units in margin. 100,000 divided by 100 equals 1,000, thus 100:1 leverage means that 1,000 units of margin is able to control a 100,000 units position.

Got Money FX also offers a mini account option. Mini accounts are essentially 10% of the value of standard accounts, meaning that mini contracts are 10,000 units of the base currency. Trading with 100:1 leverage would mean that 10 units of margin would control a 10,000 units contract.

Calculating Margin and a Margin Call
Margin is calculated 2 ways: Used Margin and Free Margin. Used margin is the amount of money used to hold open positions. Free margin is the amount of funds available to open additional positions.

Fail-safes have been put in place to help prevent a trader from going into a negative balance. This is commonly referred to as a Margin Call. In the forex market, a margin call typically means that 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) as a percentage. A trader whose equity is at $1,000 and who is using $500 of margin would divide 1,000 by 500 which of course equals 2 meaning this trader's current margin level or percentage is 200%. At 100% margin level a trader is essentially using their entire available margin. When the margin level drops to this percentage trades may be automatically closed.