Margin call is a term you will often see in the financial trading market. However, those new to trading in the Forex market probably still do not fully understand what a margin call is. If you are looking for the answer, find out now in this article.
What is a margin call?
Margin call is a situation in which traders do not have enough funds left in the trading account to maintain open positions (unclosed trading orders). When a trading account no longer has enough funds to cover open positions, the exchange will require to deposit additional funds into the account. Because of ensuring that positions remain maintained. This process is called a margin call.
When receiving a margin call, traders need to do the following:
1. Deposit money into your account: Traders can add funds to their trading accounts to increase capital. It means ensuring that open positions have enough order to maintain.
2. Close positions: Traders can decide to close some or all of their open positions to avoid being automatically closed by the exchange.
3. Accept automatic closing of positions: If you do not take any action after receiving a margin call, the broker may automatically close the positions you are opening to minimize the risk on your account.
Margin calls are an important aspect of forex trading and financial markets in general, as it deals with the risk management and capital of the trader. Understanding how margin works and how to respond to margin calls is important to avoid unexpected situations in forex trading.
When does a margin call happen?
Margin calls in forex happen when your margin drops to a dangerous level, close to the minimum limit to maintain open positions. When the level is lower than the required limit, the exchange will send you a notification email to add additional deposits to the account to maintain the current positions. If you do not make sufficient additional funds to meet the margin call, the exchange may automatically close any positions to minimize risk.
The timing of a margin call in forex depends on many factors, including:
1. Leverage: High leverage can generate margin calls faster, as it requires you to have less initial capital to open a position. However, leverage also creates greater risk.
2. Market volatility: When the market moves strongly, prices can fluctuate rapidly and affect the value of your position. If the price moves in the opposite direction of the position you open, it may lead to a margin call.
3. Position size: The larger the lot size, the higher the margin required. If you open many large positions at the same time and the market does not respond as expected, margin calls can happen quickly.
4. Risk management method: If you do not manage risk effectively, losses reach your capital management level can lead to margin calls.
5. Exchanges and specific rules: Each exchange has its own rules about margin and margin calls. The occurrence of margin calls also depends on the margin call threshold of the exchange you are using.
To avoid margin calls, you need to manage your capital carefully, use leverage cautiously, and always consider the risks when opening a trading position. Mastering trading knowledge and strategies is important to optimize your chances of success in the Forex market.
Margin call example
To better understand the margin call, we will give an example like this. For example, you have a trading account with an initial capital of $10,000 and use a leverage of 1:100. This means you can open trading positions up to $1,000,000 ($10,000 x 100 leverage).
You decide to open a long position on EUR/USD (euro against US dollar) with the size of 1 lot (100,000 currency units). The price of EUR/USD when you open the position is 1.2000. So the value of your trading position is:
100,000 (lot size) x 1,2000 (EUR/USD price) = $120,000
However, with an initial capital of $10,000 and this buying position, you need to provide some margin to the exchange, based on the exchange's required margin rate. Assuming the required margin is 2%, this means you need to provide:
$120,000 (position value) x 0.02 (required margin) = $2,400
If the market situation changes in an unfavorable direction and the EUR/USD price drops, it means the value of your trading position also decreases. When the trading position value approaches the margin value you provided ($2,400), the exchange will send you a notification.
If the price continues to fall and you take no action to replenish your account, the broker may decide to close your position to avoid further increased risk. This can lead to capital loss n and loss of initial investment.
How to avoid a margin call
To avoid margin calls in forex, you need to take careful risk management and capital management measures. Here are some strategies to help you avoid margin calls:
1. Effective capital management
You need to determine how much money you have available to invest and make sure you don't overinvest. Do not use all funds to open trading positions. Leave some reserve capital to deal with market fluctuations.
2. Choose leverage carefully
Use leverage carefully. High leverage can increase potential profits but also creates greater risk. Choose low leverage to reduce the possibility of margin calls.
3. Risk management
Determine a maximum loss you can accept for each trading position. Follow this rule and close the position if the loss exceeds that level. Adjust your lot size based on the maximum loss you accept, to minimize the impact of capital expenditure fluctuations.
4. Use stoploss and take profit
Remember to set stop loss levels to automatically close the position if the market moves in the opposite direction of your prediction. This helps protect capital from unfavorable fluctuations. Set take profit levels to automatically close positions when the market moves in your profit direction. This helps you control profits and avoid market reversals.
5. Monitor the market and adjust
You need to closely monitor the market situation and adjust your strategy according to the latest situation. Don't stick to a fixed perspective when the market changes.
6. Learn and deepen your knowledge
Learn and master the basic concepts of forex trading. Also learn about the factors that influence market movements, such as economic news, political events, national economic conditions, and more.
Can a trader postpone meeting a margin call?
A margin call must be executed without delay and without fail. Although some brokers may give you two to five days to meet the margin call, the fine print of a typical margin account agreement will typically state that the broker has the right to liquidate any or all securities or other assets held in the margin account at its discretion and without prior notice to the trader in order to satisfy an outstanding margin call. It is recommended to comply with a margin call and immediately make up any margin deficiencies in order to avoid such forced liquidation.
In forex trading, is a margin call good or bad?
The advantages of trading on margin are obvious. It enables dealers to increase their possible earnings. Using a leverage of 1:100, for instance, a trader with $1,000 in their account may manage a position worth $100,000. They would benefit $1,000, or a 100% return on their initial investment, if the market changed in their favor by just 1%. This kind of profit with such a little account balance would not be conceivable without margin trading.
Leverage magnifies possible earnings, but it also raises the chance of losses. Due to the high amount of volatility in the forex market, it is usual for the market to move against a trader's position. The trader's account balance will drop below the necessary margin level, which is known as the margin call level, and a margin call will be issued.
Leverage increases possible earnings, but it also raises the chance of losses. Due to the high amount of volatility in the forex market, it is usual for the market to move against a trader's position. The trader's account balance will drop below the necessary margin level, which is known as the margin call level, and a margin call will be issued.
Although we can intervene in many ways to prevent margin calls from happening, it is still important to know how to predict the direction of the market so that the margin level is always at a safe level. The way to do this is to equip yourself with more knowledge to know how to analyze trends and analyze the market.
>>Follow FXCE's latest news and updates through the following channels: