Avoiding Margin Call in Forex Trading

Table of Contents

Introduction

What Is Margin Call？

What Are Types of Margin Call？

What Is the Difference Between Margin Level and Stop Out？

When Does Margin Call Happen？

How to Calculate Margin Call？

How to Avoid Margin Call？

Conclusion

A Brief Introduction

Here is the Forex Encyclopedia Channel of WikiFX, a global forex expert devoted to providing you with rich and professional forex resources, such as the latest forex news, forex expertise, broker regulatory status, and many more. Today's article provides an in-depth explanation of margin calls, three types of margin calls, and 6 tips to avoid margin calls.

What Is Margin Call in Forex Trading？

A Margin Call is a notification that tells you that you need to deposit more funds into your trading account, or close out losing positions, in order to release additional margin. A Margin call requirement is typically a fixed percentage specified in the Account Specifications of your trading account and is determined by your broker. Margin levels fall when the market moves against your open positions. If the margin falls below the Margin Call percentage, then you will receive a Margin Call warning.

Put in another way, Margin Calls warn traders that the Stop Out level is approaching. For instance, a trader with a Margin Call set at 40%, and he has incurred losses of $3,800 and spent $1,000 of Margin, his Margin Level would be: ($5,000 - $3,800) / 1000 X 100 = 120%. If his Margin Level decreased by another 80%, he would reach 40% and receive a Margin Call.

Your Margin Level is the ratio of Equity to the Margin you have in place for your open positions, calculated as: (Equity/Used Margin) X 100 = Margin Level

Eventually, if his Margin Level decreased by 80% more, he would reach 40% and receive a Margin Call.

What Are Types of Margin Call？

Margins calls can be classified into three types: maintenance margin calls, regulations T calls, and minimum equity calls. In each case, margin calls can be triggered for a variety of reasons.

1) Maintenance margin call

The maintenance margin call refers to the margin requirement necessary to maintain a position. As an example, if you have $10,000 invested with a certain broker, and the brokerage sets maintenance margin requirements at 30%, your account equity cannot fall below $3,000.

2) Regulation T call

This type of margin call occurs when an investor makes a transaction in a margin account without meeting the initial 50% equity requirement. In some cases, this is referred to as a Federal Call.

3) Minimum equity call

This is the minimum amount required to open and maintain a margin account. It is sometimes referred to as an exchange call.

What Is the Difference Between Margin Call and Stop Out？

In simple terms, a margin call is a notification from the brokerage company that the equity in your account is insufficient to maintain losing positions. You need to deposit funds into your trading account, otherwise positions will automatically be closed. Your account will be stopped out if you fail to replenish it after receiving the message. In this case, all of your open trades will be forced to be closed.

In contrast, a stop out indicates that your open positions in the forex market will be automatically closed by the broker because your margin levels are too low to maintain them. The level value (expressed in a fixed percentage) is determined by each broker in the agreement and may vary.

When Does Margin Call Happen？

Margin calls occur when a trader has no more usable/free margin available. To put it simply, the account needs additional funding. Usually, this happens when trading losses drop the usable margin below the broker's acceptable level. Listed below are the top causes of margin calls:

1) Market Influences: Margin account maintenance can be challenging because the value of investments in the margin account is directly influenced by the market. Accordingly, your margin balance can fluctuate daily in response to the performance of your investments.

2) You Own Decision: Margin calls can be triggered during times of high market volatility when you decide to trade on margin. It is important to keep track of the current economic climate in order to gauge its potential impact on your investment decisions.

3) Your Brokerage: Your broker has the right to increase the margin maintenance requirement at any time. There are a variety of reasons for which they may do this, and they may do so without warning. Should your account balance fall below the new minimum, a margin call will be initiated.

How to Calculate Margin Call？

Let's say you have thoroughly reviewed the terms and conditions of your brokerage firm and found out that you receive a margin level of 100%. In practical terms, what does this mean and how can you apply it？

A margin level can be calculated by dividing the balance on the account by the collateral for the traded instrument and multiplying the result by 100%.

Lets calculate the margin call (Calculation example):

• Trading account balance — $1000

• EUR/USD Pricing — $1.1615

• Lot size — 0.1

• Leverage — 1:200

• Margin amount — $232.3

When opening the trade, the margin level will be: $1000/$232.3*100% = 430%

Here is a video that explains how to calculate the margin call amount in more detail:

How to Avoid Margin Call？

To avoid margin call, here are five tips for your reference:

1) Don't use a margin account

To stay out of trouble, simply trade with a cash account. Trading with a margin account can produce greater profits, but it can also produce significant losses. You can earn a healthy profit while trading without margin, even though the potential profits are smaller.

Anyone who trades on margin is familiar with the nightmare of a margin call. Trading without margin eliminates this risk, giving you peace of mind and helping you feel more in control of your financial situation.

2) Implement proper risk management

Scalping strategies, for example, require large amounts of leverage, even when they involve a risk of only 1% or 2 %. Consider setting your leverage to 50:1 or 100:1 if you are not scalping.

Trading with a reasonable amount of leverage, restricting your risk per trade to no more than 2%, sizing your positions appropriately and never opening more than a couple of positions at once will make margin calls almost impossible.

3) Keep Yourself Informed

It is a best practice not to check on your investing account on a daily basis; however, this changes with a margin account due to the higher levels of risk. Investors may want to consider adding alerts should the price fall within a certain range.

4) Use Stop-Loss Orders

Put a stop-loss order on each open trade in order to limit any downside risk. If you are executing an open trade, you may specify the stop-loss rate at the time of executing the trade, or add a stop-loss order at any time during the trading process. Also, you can change your stop-loss orders at any time in order to reflect current market conditions.

Stop Loss and Take Profit orders are not guaranteed and gap in market pricing may result in your Stop Loss order being filled at a less favorable price, or your Take Profit order being filled at a more advantageous price.

5) Know Your Broker's Margin Requirement

Modern brokers have a comprehensive set of margin requirements. Different asset classes, investor classes, account types and even securities within each asset class will have different maintenance margins and margin call rules.

Be sure you fully understand the margin requirements before placing any trade, and then set your risk parameters accordingly.

Read the fine print carefully contained in your broker's margin call rules to understand exactly how your broker will handle margin calls for each asset class in which you trade. Do not hesitate to contact your broker if you do not understand.

6) Set Your Own Minimums

Establish a maintenance margin in excess of your brokerage's. As soon as your account reaches this limit, you should transfer financial resources over in order to avoid a margin call and prevent your brokerage from selling securities.

Conclusion

To summarize, a margin call is a risk associated with margin trading, or trading with borrowed funds. If your account balance falls below your broker's margin requirement, you may be required to provide additional collateral, which may mean selling your investments or liquidating your entire investment portfolio.

In order to avoid margin calls, it is important to understand how your brokerage account operates, diversify your investments, and stay informed about market trends. When it comes to gaining a better understanding of the forex market and forex trading basics, WikiFX is an excellent resource. It is a professional forex broker information-checking platform that provides rich forex-related educational resources, virtual private servers, forex EAs, forex market analysis and more. You can learn more about forex-related information by visiting the WikiFX website or by downloading the WikiFX App, where big forex data is accessible with just one click.