Jump to content

Margin Calculations


Guest lukemos
Message added by JamesIG

This thread contains an account type known as "Limited Risk". Due to regulatory changes this account type no longer applies for European countries. If you have any questions relating to this, or wish to continue the discussion, please start a new thread. 

Recommended Posts

Guest lukemos

Hey there,

 

I'm new in these parts, and am currently working my way through the webinars etc to get caught up on how the IG platform works etc, and am having some difficulties in understanding the logic behind the margin calculations.

 

So, In no particular order :

 

  • Why is the margin required to open a deal with a guaranteed stop more than the amount of money that is at risk? eg example 1 below, max loss is €100 (+ €12 stop premium), and yet margin required is €622 ?
  • Why is the margin required for a normal stop less than a guaranteed stop? eg example 2 below, margin is €396 versus €622 above. Intuitively I'd have thought that as potential losses with a guaranteed stop are less than those with a normal stop, the margin required should be less.
  • And finally, the margin required for that same guaranteed stop trade as above, when entered into my limited risk account (rather than the demo account for the first two examples), is a completely different figure €497 versus €622. This seems to be due to the difference between the margin factor of 0.4 in my LR account, and 0.5 in the demo account. Is this expected? If my account wasn't limited risk, would the margin factor be higher in general?

Apologies if I've mangled the intent of some of those questions, but I feel like I'm missing some basic understanding here, and would appreciate any pointers / materials that any might help me.

 

Thanks,

Michael

 

 gs.jpgns.jpglsgs.jpg

 

PS : the information on margin requirements shown for EUR/USD is consistent with my thoughts that the margin for a guaranteed stop should be equal to the (max) possible loss as per below : 

 

image.png

Link to comment

Great question - thanks for submitting it to Community. 

 

The primary thought process on this comes down to leverage. It's important to understand that 'financial risk' and 'leverage' are separate things, and although the actual risk can be low, if you reduce the margin required on that trade then you're actually increasing the leverage. There are some differences between the Live and Demo account as Demo is also used as a test environment for our dev team as well as for clients. 

 

The three calculations are

 

No Stop: Bet size x price (in points) x deposit factor (%)

Stop: (Deposit requirement for no stop x slippage factor %) + (bet size x stop distance from current level)

G Stop: The larger figure of the two calculations below:

  1. Bet size x stop distance (in points) + limited risk premium
  2. Bet size x price (in points) x deposit factor (%)

 

Up until recently adding a guaranteed stop would reduce the margin required on a trade, however after a recent review although a GStop reduces financial risk, it would actually increase leverage by following this process. This wasn't the beneficial outcome, especially given the recent review on leverage trading by the regulators, so we set out to change our processes. 

Link to comment
Guest straddle

The ONLY reason the regulators want to limit leverage is in order to limit the risk of loss. If the possible loss is limited by a GUARANTEED Stop loss, which the regulators want to make compulsory, then the degree of leverage is totally irrelevant. Therefore the  reasoning in the above post makes no sense at all.

Link to comment


wrote:

The ONLY reason the regulators want to limit leverage is in order to limit the risk of loss. If the possible loss is limited by a GUARANTEED Stop loss, which the regulators want to make compulsory, then the degree of leverage is totally irrelevant. Therefore the  reasoning in the above post makes no sense at all.

Hi - although I do understand your thinking, the above logic has been put in place based on a very in depth review of regulation and the frame work surrounding leverage for retail clients. We meet very regularly with the regulators and although in theory a clients financial risk is restricted with a guaranteed stop, the fact of the matter still stands - without the above, adding a guaranteed stop still increases your leverage. 

Link to comment

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
  • General Statistics

    • Total Topics
      21,205
    • Total Posts
      90,754
    • Total Members
      41,316
    • Most Online
      7,522
      10/06/21 10:53

    Newest Member
    Delboy
    Joined 31/01/23 12:42
  • Posts

    • The ECB is expected to raise rates again at its meeting this week, but will it be enough to bolster the euro? Source: Bloomberg   Forex Indices European Central Bank Euro EUR/USD United States dollar  Chris Beauchamp | Chief Market Analyst, London | Publication date: Tuesday 31 January 2023  What will the ECB do? The European Central Bank (ECB) is expected to raise rates by 50bps at its meeting. What is the background? Like most major central banks, the ECB has been pushed into raising rates in order to combat high levels of inflation. While energy prices have come down, price increases remain above the ECB’s 2% target, and as a result, the bank still views it as necessary to push ahead. No ECB member has dissented from this view of late, leaving markets with little indication that a dovish caucus is forming. Indeed, inflation remains high, but economic data remains resilient. Expectations for a recession, which were widespread as 2022 ended and 2023 began, have been pushed further out, towards the second half of this year and even into 2024, helped by a slump in energy costs that has allayed the worst fears of economists and investors. What is the market impact? If the ECB can send a suitably hawkish message along with the expected 50bps rate hike, then the euro may receive some support against the US dollar. However, euro bulls must be aware that the pair has come a long way since the October lows, and while it only puts a modest dent in the 2022 downtrend, it does mean that the bar for further EUR/USD gains is rather high. This is coupled with negative divergence on the daily MACD indicator, which suggests weakening bullish momentum in the short-term and a general unwillingness to push the rally much further in the near-term. If the ECB is not viewed as being sufficiently hawkish, then EUR/USD may continue to weaken from its eight-month highs, but a move below $1.05 would be the minimum needed to indicate that the sellers have reasserted control. Source: ProRealTime Meanwhile in indices, a weaker euro could give the Dax some fresh impetus, but this would need to be fairly strong to counter worries about a weakening eurozone economy that might ensue. And if the ECB is much more hawkish and provides EUR/USD with a reason to recover then the risk to eurozone stocks is skewed to the downside. Some might argue that, given the huge rally in the Dax this month, some weakness is needed to take the froth out of the index, which may well be pricing in too optimistic a scenario. A drop back towards the 50-day SMA might bring the June and November 2022 highs into view as potential support. This would still leave the uptrend intact. Bulls would welcome further gains in order to cancel out the MACD’s negative divergence that looms large at present. Further upside targets 15,605 and then 15,725. Source: ProRealTime
    • Charting the Markets: 31 January FTSE, DAX and Nasdaq consolidate after latest leg higher. EUR/USD and GBP/USD fall back while USD/JPY rallies, ahead of central bank decisions. And Brent, gold and aluminium prices drop ahead of central bank meetings. Axel Rudolph FSTA | Senior Financial Analyst, London | Publication date: Tuesday 31 January 2023           This is here for you to catch up but if you have any ideas on markets or events you want us to relay to the TV team we’re more than happy to.
    • EUR/USD and GBP/USD fall back while USD/JPY rallies, as investors await central bank decisions The dollar has recovered to an extent this week, but the uptrends in EUR/USD and GBP/USD, along with the downtrend in USD/JPY, remain intact for now.  Chris Beauchamp | Chief Market Analyst, London | Publication date: Tuesday 31 January 2023  EUR/USD continues to drop back from recent high A modest pullback continues here with EUR/USD, eating into gains made since the beginning of the year. As markets brace themselves for a double hit of a Federal Reserve (Fed) and European Central Bank (ECB) meeting within a 24-hour period, EUR/USD has fallen back somewhat from the eight-month highs it reached last week. This is the first real weakness since the first week of January, and would leave the uptrend intact unless we see a move back below $1.04. If the price recovers above $1.05 then the bullish view is arguably intact and a bounce back towards $1.09 and higher may well develop. Source: ProRealTime GBP/USD stalls at December high Weakness here with GBP/USD has seen the price falter at a similar level to early December, with a possible negative divergence in the daily moving average convergence/divergence (MACD) sending a cautionary signal for bulls. Just as EUR/USD traders have to deal with the Fed and ECB decisions within the same 24-hour period, cable traders must cope with the Bank of England (BoE) decision following hard on the heels of the Fed’s. Much thus depends on that period for the next move in GBP/USD, though it will still arguably take much steeper losses to reverse the broadly bullish outlook. For that to happen we would need to see a drop below the 50-day simple moving average (SMA), followed up by a fall below the 200-day SMA. Having failed to establish a higher high, and with the MACD negative divergence a risk, the uptrend could come under pressure. A reversal above $1.24 would put the buyers back in charge. Source: ProRealTime USD/JPY edges up The greenback in USD/JPY has seen a modest recovery off its January lows, as the Bank of Japan (BoJ) dials down any hint of hawkish rhetoric. Nonetheless, the downtrend is still firmly placed. A move back above the 50-day SMA to suggest perhaps some further short-term strength, but the mid-December high around ¥134.00 would act as a barrier. Sellers will be looking for a fresh reversal that puts a move back to the January lows in play, and then sees a move below the May 2022 low around ¥126.50. Source: ProRealTime
×
×
  • Create New...