The third way to use the K Factor is to avoid what the forex brokers call the ?safety net?, and what I call ?kill but do not dismember.?
Margin is not a down payment. It?s cash-on-hand, your cash, that the broker uses to protect its own capital account from your mistakes. That?s all well and good because the global forex market will continue to work only if all participating brokers have adequate capital to meet their customers? settlement obligations.
If losses from current open positions cause the equity in your account to fall below that required to maintain the total number of open positions, the broker?s trading platform will immediately close all your open positions, even when the unrealized loss on any individual position is quite small. Your loss is the aggregate number of PIP per position * K Factor + execution costs. In almost every case that?s just about everything in your account. This is the broker?s safety net because you will not lose more cash than you had in your account (as can and does happen with commodities futures accounts.)
The formula is:
(Starting Balance ? Open Position Losses) / (($1,000/K Factor)* No. Open Positions) -1 <10% = Kill But Do Not Dismember.
Most if not all broker platforms keep a running balance of your available margin to help you avoid this fatal situation. If you intend to trade multiple positions and fade into suspected price turning points you should consider setting up this formula in a spreadsheet so that you get an early warning long before the situation goes critical.
Mini accounts are based on 10,000 individual currency units with different margin requirements so make the necessary adjustment in the above formulas before doing the calculations