A margin call is one of the most essential concepts that every forex trader needs to learn about, although it is not uncommon among beginners for a handful to have misconceptions about it. In other words, you get a margin call when your trading account’s balance no longer meets the broker’s margin requirements, which can then block your account from further trading until you either deposit the funds needed or close enough positions to free up the required collateral to continue.
Before you can understand what a margin call is, you have to know the "basics" of margin trading. When you trade forex, you don’t pay the full value of your position upfront. You’re not paying the full price for a piece of cake; instead, you’re putting down a “margin,” a fraction of the full cost. You can control a big trading position with a smaller account balance - that’s known as leverage.
Understanding Margin and Margin Level
To be able to manage margin calls, you should have a thorough understanding of how margin and margin level calculations work. It might sound confusing, but these are important strategies that you need to know if you want to manage your trading risk properly.
There are two main types of margin. The initial margin is what it will cost you to open a market position (usually 1-5% of a total trade, depending on the leverage). The maintenance margin is the lowest your account balance can drop to keep all your positions open, and it is generally set at 50% or 100% of the initial margin.
The margin level is the health of your account, expressed as a percentage, and calculated as follows: (Equity ÷ Used margin) x 100%. This percentage tells you when your account is getting too close to a margin call. The vast majority of brokers send margin calls on a margin level of 100%, but a few use 50% as the cutoff.
Common Causes of Margin Calls
It’s important to know what can cause margin calls and how to avoid them. The price of the stock decreases to a certain point at which the market investor has no choice but to throw in the towel and sell because the loss is no longer acceptable and is too much risk for their account. Most margin calls are the result of both market conditions and trading decisions that combine to place the account in an extremely dangerous position.
Big changes in the price of the market are what usually get the blame. When there is big news, a major economic event, or something that comes out of left field, that moves the market either higher or lower, you may see a currency pair gap or move aggressively. Take the Swiss National Bank and the 2015 drop of the EUR/CHF peg: the CHF gained 30% in minutes, destroying thousands of accounts worldwide in margin calls and liquidations.
How to Prevent a Margin Call: Risk Management Tips
As always, prevention is better than a cure, and that holds for margin calls. The best way to protect yourself from having your account blow up from forced liquidation is to build solid risk management practices.
Employ conservative leverage and resist the urge to over-trade. Gone were the days when you would see brokers offering you 500:1 leverage and expect to use it. Conservative traders typically only use maximum leverage of 10:1 or 20:1 at the most, and even large unexpected moves would not threaten their accounts. Leverage is a double-edged sword and should be wielded with discipline.
Conclusion:
To be a successful forex trader, you need to understand what a margin call is. This is when you receive a margin call, your account equity goes below the regulatory minimum (maintenance margin requirement), and your broker gives you an ultimatum: inject more cash or lose your positions (in other words, a forced sale).
The margin level formula: (Equity ÷ Used Margin) x 100% is used by your broker to determine the state of your account. As soon as that percentage falls below your broker’s threshold (usually 50% or 100%), you are in margin call territory.
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