Lesson 11: Trading in Theory: Can You Trade With $100?

Now that you’ve become familiar with some of the basics of forex trading, you may be excited at the prospect of trading on your own.  

However, you may worry that you don’t have the deep pockets that seem necessary when trading forex. You may also think, “Is it possible for me to start trading with only a hundred bucks?” 

In this lesson, you’ll learn the answer to this very question: can you start trading profitably with only a USD 100-dollar deposit? 

Lesson Highlight 

• Margin trading lets you control a larger position than you originally could with only USD 100. 

Trading With a $100 Deposit 

If you recall your lesson on margin trading, you are likely aware that with USD 100, you can control a larger position than you could normally take. 

With margin trading, you can theoretically start to trade with just a USD 100 deposit. 

Let’s assume that you did start trading with this small deposit amount and selected Johnnie Broker as your broker. 

Johnnie Broker’s margin call level is 100%, while its stop-out level is 20%.  

Once you know your broker’s margin call and stop-out levels, you can begin putting your USD 100 on the line and deposit it into your trading account. 

Now, you have USD 100 in your trading account. 

Required Margin 

The second step will be calculating the required margin for the position you want to open. 

Suppose you plan to go short on the EUR/USD at an exchange rate of 1.3000 and open a one-micro lot (1,000 units * 5) position. 

Johnnie Broker has a 1% margin requirement. Since your trading account’s base currency is USD, you must convert EUR to USD first to determine the trade’s notional value.

To do this, you simply multiply your trade size by the current exchange rate. 

Notional Value = Trade Size * Exchange Rate 

Since you’re trading one micro lot, your trade’s size will be 1,000 units, while the exchange rate is 1.3000. 

1000 * 1.3000 = 1,300 

Your trade’s notional value is USD 1,300. 

To determine the required margin, multiply the notional value by the margin requirement. 

Required Margin = Notional Value * Margin Requirement 

1,300 * 0.01 = 13 

This means that your trade’s required margin will be USD 13. 

Since your only open trade position is the one you just entered, your account’s used margin will be equivalent to the required margin. 

If the market moves in your favor and you gain unrealized profits from your open position, your account’s equity value will increase. Let’s assume you have a USD 50 floating profit. 

Equity = Account Balance +/- Floating P/L 

USD 100 + USD 0.00 = USD 100 

Your account’s equity value is now USD 150. If your floating profits turn into losses, they will be deducted from your USD 100 account balance. 

Now that you know your equity, you can use it to determine your free margin.

Free Margin = Equity – Used Margin 

USD 100 - USD 13 = USD 87 

Your free margin is USD 87. 

You will also use the equity value to calculate your margin level. 

Margin Level = (Equity / Used Margin) * 100 

Margin Level = (USD 100 / 13) * 100 

Margin Level = 7.70 * 100 

Margin Level = 770% 

Your margin level is 770%. 

By this time, your account metrics will look like this: 

What Happens When the EUR/USD Moves

Suppose the EUR/USD market price drops by 80 pips from 1.3000 and is now trading at 1.2920. This downward price movement will ripple through your account and affect your trading metrics. 

The 80-pip drop will affect the following: 

• Used Margin. The notional value of your trade moves with the exchange rate, which will require you to recalculate your used margin. The 80-pip drop will bring your used margin to 12.92. 
• Required Margin. Since you only have one open position, your used margin is equivalent to your required margin. 
• Floating P/L. With an 80-pip drop in the EUR/USD market price, your open position will incur a floating loss of USD 80. 
• Equity. You now have a USD 80 floating loss, which will be measured against your USD 100 account balance. This means your equity went down from USD 100 to USD 20. 
• Free Margin. Free margin is determined by deducting your used margin from your equity. This means your free margin is now only USD 7.08. 
• Margin Level. The price change will also decrease your margin level, from 770% to only 154%. 

After this drastic price movement, your trading metrics will now look like this: 

The 80-pip downward movement brought your margin level close to the 100% minimum requirement. If it goes below this threshold, you will receive a margin call from your broker. 

You have the following options if this happens. One, you can immediately close your position to prevent further losses. Two, you can deposit more money into your account to bring your margin level back up. Or, three, you can ignore the margin call and hope the market moves back in your favor before your margin level goes below your broker’s stop-out level. 

If you choose to ignore the margin call and your margin level dips below Johnnie Broker’s 20% stop-out level, your broker will automatically close your position.

This scenario shows how quickly the market can devour a very small deposit. While it is possible to trade with only USD 100, its modest size makes it especially vulnerable to market upheavals.

In the next lesson, you’ll learn that not all brokers set the same level for their margin calls and stop-out levels.