Introduction of Maintenance Excess The term Maintenance Excess, also known as maintenance margin, or requirement, is a key concept in the trading and investment world. It refers to the minimum amount traders must maintain in their accounts to cover any open positions, and to protect against potential losses from leveraged trades, in which you control larger positions by contributing less capital. This is especially important for leveraged accounts, where larger risks demand greater capital reserves to control.
The Maintenance Excess component is a key part of traders' risk management. Maintenance excess ensures traders have sufficient capital to cover potential losses in the event of market fluctuations. This helps them avoid falling into negative equity status.
Calculation for Maintenance Excesses
To calculate maintenance excess, you must subtract the trader equity balance from your initial account balance (which represents unrealized losses). This value represents the minimum amount of funds required in your account to meet maintenance margin requirements.
The consequences of not meeting maintenance excess
Failure to adhere to maintenance excess requirements may have severe consequences for traders. If an account falls under its required maintenance margin, the broker may issue a call for margin, which will require them to deposit additional funds to their account to bring it back up to that level.
Monitoring Maintenance Excess
By regularly reviewing open positions, account balances, and market conditions, traders can make informed decisions about risk management and meet required maintenance margins.
The concept of Maintenance Excess plays a crucial role in risk management and trading. Maintenance Excess is a form of insurance for traders. It ensures that they have sufficient funds to support their position without going into negative equity. Understanding its calculations, possible consequences, and monitoring purpose, a trader is able to effectively reduce his/her trading risk, while increasing the chances of long-term success.