Newbie's question on margin

[Pacho]

Hello

I am new on this. I have read a couple of small basic manuals
about Forex. Yesterday i found a series of lessons in a known
forex site. An example on margin calculation called my atention-

I am transcribing it:
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Let’s take a trader with $1,000 in his account, which is his total balance or equity. Our trader buys 1 Lot of EUR/USD at a price of 1.2750 with the 400:1 maximum leverage. The trader’s utilized margin is $250 and he or she has $750 of floating equity or unused margin.
__________________________________________________ __

There are some issues in this example that didnt leave me
sleep last night.

My books say the base currency on a trade is the first
appearing on the pair's name. Euro in this example, and a
lot is equal to $100,000 [base units]. Then this trader is
buying $100,000 [Euros]. Without leverage he or she would
have to pay $1.2750 [USD] for each Euro, or

1.2750 x 100,000 = $127,500 [USD] for 1[Euro] lot

But, since the leverage is 400:1 the trader will have to pay

127,500 [USD] / 400 = $318.75 [USD] for the lot

Then, in my opinion, the used margin for this trader is
$318.75 [USD], However the web page says the trader is
using only $250 [USD] margin.

It seems they made the margin calculations using the
counter currency, [USD] in this case, and not the base
currency. Is it a right way to do this?. Why is USD used
for the calculations.... because it is the currency the trader
has his account?, or just because it is US Dollar, the most
important currency in the international currencies market?

I will appreciate any explanation on this example, and
suggestions of books or web tutorials with more practical
examples like this one, since the manual i have read doesnt
have any example.

Thank you in advance.

Pacho

Forex Books

	Leverage Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.<p>To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000). For more on leverage, visit the following links: http://www.goforex.net/forex-leverage.htm http://www.goforex.net/forex-leverage-2.htm

	Margin The deposit required to open or maintain a position. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

[DrForex]

Pacho

You are right and they are wrong. It is advisable not to deal with people who do not know the basics of forex but put themselves forward as experts.

Cheers
DrForex

Dr Forex's Bird Watching in Lion Country ebook

[HawaiiDuane]

Yes, your assumptions and calculations are correct.

My only thought: Some broker-dealers now only allow 50% of your total account margin to be used as tradable margin. If so, it may technically change your leverage ratio.

Featured Forex Brokers

	Leverage Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.<p>To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000). For more on leverage, visit the following links: http://www.goforex.net/forex-leverage.htm http://www.goforex.net/forex-leverage-2.htm

	Margin The deposit required to open or maintain a position. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

[Pacho]

DrForex and HawaiiDuane:

Thanks to your answers it is clear to me that the web page is
wrong.

Thank you very much

Pacho

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