The Concept of Margin Call Forex

A margin call notifies traders that their account balance has fallen below the requirement level. Understand the concept of margin call forex with examples.

Well, forex traders must have heard the word called margin call. The word may sound simple, but it is like a nightmare for traders, & they may lose their entire capital because of it. In this article, we will understand the concept of margin call forex with examples and what causes these warnings.

What is a Margin Call in Forex?

A margin call is a warning by the foreign exchange broker to notify traders that their account balance has fallen below the minimum requirement level, and they have to deposit more money to keep their existing trade position open.

For margin calls, brokers use different modes, including emails, phone calls, WhatsApp, and text messages. Traders fear these trading warnings as it is an indication of account blowing.

A Forex margin call may have several negative effects, like closing existing trades, not being able to open new positions, and a need to deposit more funds in accounts.

Margin Call Forex Example

Let us look at an example for a better understanding of the margin call concept. Suppose a trader has a balance of 2000 USD in his account.

The margin requirement is 50%, which means 1000 USD. He has already used the capital of 500 USD. The free margin is 1500 USD (2000-500).

The margin requirement is 1000 USD, and he has a free margin of 1500, which is 50% more than the requirement. So now the trader is in a stable position.

However, his account balance fell to 1000 USD due to a loss in existing trade. He got the first call, but the trader ignored it, and his account balance further fell to 500 USD, which is 50% of the margin requirement. So, in this case, the broker will start to close the positions automatically.

Margin Call Level in Forex

argin call level is the measure the forex broker uses to identify when to call a trader for fund requirements. Simply put, it is a percentage when the trader receives a margin call.

Two elements are required for margin level calculation: equity and used margin.

Equity is the sum of the account balance and unrealized profit or loss from open positions, and the used margin is the portion of the account balance that is already used to place a trade. In case of no open position, equity equals the account balance.

A trader will receive the margin call in forex when the equity falls below the used margin.

Margin Call Forex = (Equity =/< Used Margin)

Where: Equity = Balance + Unrealized or Notional Profit/Loss

Suppose a trader has an account of 1000; he has used the margin of 500. Let’s say your broker has a Margin Call Level of 100%.

Now, equity as per above formula = 1000 (1000 + 0)

Margin level formula = (Equity / Used Margin) * 100%
= (1000 / 500) * 100%
= 200%

In this case, a trader will not receive the margin call; however, suppose the trader has suffered a loss of 500 (notional loss), and now your equity has reduced to:

Equity = 1000 – 500 = 500.

Margin Level = (500 / 500) * 100
= 100%

Since the margin level has reached 100%, hence the trader will now not be able to open any trades.

In this case, the equity is less than the used margin, which means it’s a margin call level. The trader will receive a margin call now.

In this case, the trader will have to
1. Deposit additional funds so that the Equity amount gets greater than the Used Margin.
2. Or the Trader will be required to close out existing positions.

If losses further deepen, and margin level falls even below 100% (to a prespecified level), then the broker will itself close your existing position in loss.

The prespecified level at which broker closes your open position in loss is called the Stop Out Level.

So, a trader should aim to keep the equity more than the used margin to avoid margin calls.

What Causes Forex Margin Calls

No traders want to get a margin call, as, in the end, it has a negative impact on their trading journey. So, let us identify its causes and how to avoid margin calls in forex.

Over leverage

The concept of margin trading is based on leverage. Leverage facility allows traders to open large positions with small capital. However, to get this facility, you need to maintain the margin.

There are different leverage ratios like 1:10, 1: 50, 1: 100, 1: 500, etc. So suppose your trader is giving leverage of 1:50, and your capital is 100 USD. So you can place a trade worth of 5000 with it.

However, leverage trading is quite risky, and one may suffer huge losses if not used properly and end up getting a margin call.

Unfavorable market conditions

No trader can predict the market with 100% accuracy, and that’s what trading is about. Making and losing is a part of the trading game; however, when the amount of losses becomes unaffordable, it is a matter to worry about.

A trader should understand that the market may move against their prediction, impacting the capital and available margin. So, always keep your eyes on your trading account.

Sticking to a losing trade

One of the biggest mistakes traders can make is sticking to a losing trade, hoping the price will move in their favor.

However, traders need to be specific about the loss amount they can afford to lose, and when the point hits, they should take an exit from a trade; otherrwise, they will end up blowing the accounts.

Emotional trading

Another reason the trader gets margin calls in forex is attaching emotions to the trade. Emotion is a part of human nature, and you cannot eliminate it.

However, you can control your emotions. Greed, over-confidence, and fear are the biggest enemies of traders. When trading is affected by these emotions, one can forget about margin requirements.

Ignoring stop loss

Stop loss is a tool to limit the losses and close a trade when the price moves against you. You can also set the stop loss level considering the margin requirements.

Stop loss may have many benefits, but many traders place a trade without using it. A trader should remember that stop loss is a precaution, and not using it suggests they are not valuing their hard-earned money.

Wrapping Up

Currently, trading is a growing career option with several facilities, and margin is one of these facilities. A trader can make a significant amount of money using margin and leverage.

One can increase the account size many times or blow the existing capital depending upon the approach. A trader should use the margin call forex strategy to manage and avoid these calls efficiently.

Also, continuously watching your accounts balance, order management, leverage management, and right psychology are the elements you should take into account to avoid margin calls.