What is a margin call in the forex market?deltafx writer 20 September 2021
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In traders’ conversations, you have probably heard many times that their trading account has been margin called for various reasons. Maybe after hearing that, you wondered what a margin call is. You may even wonder who to prevent that. If you are new to the Forex market and have not started trading seriously yet, you need to be familiar with such terms. Undoubtedly, knowing such Forex terms will help you make the best decision when you encounter one of them. On the other hand, you can greatly reduce the risk in your trades.
Margin call definition
As long as your account balance is positive and you open a position, a part of this account balance will be considered a guarantee. This amount is usually about 30% of the account balance. This means that you can lose up to 30% of your balance. When you lose more than 30%, it is said that your account has been margin called. After seeing such a warning, you will be able to exit the margin call mode under the following conditions:
- Toping up in your trading account
- Closing some of the open positions
For example, a trader has $10,000 worth of stock in his account. Here let us say the margin call will be triggered when the account value falls below $7000. Imagine he has 550 shares, and each of them is worth about $18.18. If the price of each share drops from $18.18 to $12, the worth of stock in the trader’s account will be $6600. Then it triggers a margin call of $400.
But before we go into more details, we need to be familiar with some trading terms:
The margin level expressed as a percentage is the amount of margin that a trader holds to open a trading position. The higher this amount, the more “free margins” you will have for trade. You can calculate it with the following method:
Margin level = (equity / used margin) * 100
Free margin equals the amount of free money that you can use to open positions. When this amount shrinks down, you will not be able to open a position. Free margin equals the difference between equity and the used margin amount in your open positions.
Imagine you are trading after opening a DeltaFX broker account. As we said earlier, to get rid of call margins and more losses, you must either close your open positions or top up your trading account. For any reason, if you do not perform one of them and this amount reaches 20%, Stop Out will be activated for your trading account. A stop-out occurs when the margin level drops to a certain level. This figure is expressed as a percentage (%), and it varies in different brokers. All open trading positions will automatically be closed by your broker as a result of the stop-out.
By using trading leverage, you try to maximize your profit by borrowing some money from a broker. Without using leverage, you can only trade up to the amount of your account balance. However, using this tool that the broker provides is an advantage. It can help clients trade with higher capital than their initial capital.
What is the relation between margin call and leverage?
Their function is totally reversed. This means that the more leverage we use to make a trade, the lower the margin level will be involved. As long as the trader mainly uses the money provided by the broker, the necessity to use the required margin in the trader’s trading account decreases.
How to prevent a margin call?
Manage your trading positions. Always consider you’re the margin of your account before opening a new position. Using stop-loss your trades is very useful because when the price of an asset reaches a certain point, the stop-loss will close the position to prevent further losses.
Opening only one trading position and involving all of your capital in one position is a huge mistake. Overconfident people usually use such strategies and make such mistakes. Knowing the risk management methods about your trades will help you a lot to prevent margin calls.
The main reason for a margin call
It happens for different reasons. For example, when your capital is not so high, you try to use leverages to maximize your profit. The reason for using leverages is being afraid of losing a significant amount of profit in your trades. When the market moves against your predictions and you emphasize keeping your positions open, you may lose a lot of money.
A margin call is a warning that tells you the margin level in your account has reached 100% of its capacity. To solve this problem, you have only two choices; topping up your account or closing your other open positions. Margin call usually happens due to a lack of knowledge about the psychological factors of the markets. If you enter this market with sufficient knowledge and training, you will certainly learn ways to overcome the emotional trades and excitement caused by the market and thus minimize the risk of your trades.