As much as traders appreciate leverage, a forex margin call is something they would like to see the back of. Who can blame them? A margin call is essentially a trading account’s distress signal. Now we’re getting ahead of ourselves. Let’s see the forex margin call explained. It is the minimum amount of fund a trading account requires to open a leveraged trading position. Also, the required margin which determines the maximum leverage you can use. That’s why trading using leverage is also called trading on margin.
For instance, when you’re trading on 1:10 leverage, then for every $10 you invest in the market you need $1 as margin in the trading account. In this case, the margin is 1/10 or 10%. The next thing you need to know is free and used margin. As the name suggests, the used margin is the part of your trading capital utilized in opening a position. And the free margin is the amount of money still available in the trading account for placing new trades.
So if you have an account balance of $2000 with a trade margin of 5% and you need to open a position of $4000. And equity is the sum of the account balance and any profit or loss from an open trading position. Then,
Account Balance = $2000 Margin = 5%
Required/Used Margin = $200
Free Margin = Equity – Used Margin = 2000 – 200 = $1800
So if you make a profit or loss of $50 from an open position, then it will be included in the free margin. And margin level is the threshold brokers use to determine the need for a margin call. Basically, a margin call is a notification or warning from the broker that your margin level has fallen below their decided juncture.
Margin Level = (Equity/ Used Margin)*100
And as long as your equity is greater than your used margin, there is no scope for a margin call. And the moment your equity becomes equal to or less than the used margin, you will receive a margin call.
Consequently, a margin call is when you don’t have enough free margin or usable funds in your trading account to open a new trading position. And as a trader, you never want to reach a point where an open trade is taking down your whole trading capital. Hence, the unyielding desire of traders to avoid margin calls in general.
So how can you avoid this nightmare? The main thing is use to leverage wisely. As you have heard time and time again, never trade more than you can afford to lose. While leverage makes profit multiply, it is the same with losses too. Next is utilizing stop losses to the maximum. Never open a trading position without having a proper stop loss in place. And if you can, don’t cut too close. Keep a healthy amount of margin in your account while you trade. All these are just a few easy but mandatory steps for avoiding margin call as well as trading wisely.
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