Margin call forex is one of the most dreaded terms in forex trading. It means that your broker has closed some or all of your open positions because your account equity has fallen below the required margin level. Margin call can result in significant losses, account wipeout, or even debt if you trade with negative balance protection.
Margin call is not a rare occurrence in forex trading. According to a study by the Bank for International Settlements, about 40% of retail forex traders experience margin call or stop out at least once a year. Moreover, margin call can happen very quickly, especially during periods of high market volatility or unexpected news events. For example, in January 2015, the Swiss National Bank unexpectedly removed the cap on the Swiss franc, causing a massive spike in the currency’s value. Many forex traders who were short on the franc faced margin call and huge losses.
In this blog post, we will explain what margin call forex means, how it works, why it happens, and what to do when it happens. By understanding these concepts, you will be able to avoid margin call or minimize its impact on your forex trading performance.
What it means: Margin Call Forex
Margin is the amount of money that you need to deposit with your broker to open and maintain a leveraged position in the forex market. Leverage is the ratio of the position size to the margin required. For example, if you have $1,000 in your account and you use a 100:1 leverage, you can open a position worth $100,000. Leverage allows you to trade with a larger amount of money than you actually have, which can amplify your profits or losses.
Margin level is the percentage of your account equity to the margin used. It indicates how much margin you have left to open new positions or sustain your existing ones. For example, if you have $1,000 in your account and you use $500 as margin, your margin level is 200%. The higher the margin level, the more margin you have available. The lower the margin level, the less margin you have available.
Margin call forex is a situation where your margin level falls below a certain threshold set by your broker. This means that your account equity is not enough to cover the margin required for your open positions. When this happens, your broker will notify you and ask you to either close some of your positions, add more funds to your account, or reduce your leverage. If you fail to do so, your broker will automatically close some or all of your positions at the current market price to prevent further losses. This is known as stop out or liquidation.
How it works
The process of margin call forex varies depending on your broker’s policies and terms of service. However, the general steps are as follows:
- You open a leveraged position in the forex market with a certain amount of margin.
- The market moves against your position, causing your account equity to decrease.
- Your margin level drops below the margin call level set by your broker. This is usually between 50% and 100%, but it can vary depending on the broker and the type of account.
- Your broker sends you a margin call notification, either by email, phone, or platform message. This is a warning that your account is at risk of being stopped out or liquidated.
- You have a limited time to take action to restore your margin level. You can either close some of your positions, add more funds to your account, or reduce your leverage.
- If you do not take any action, or if your margin level drops below the stop out level set by your broker, your broker will automatically close some or all of your positions at the current market price. This is to protect both you and your broker from further losses.
Why it happens
Margin call forex can happen for various reasons, but the most common ones are:
- Market volatility: The forex market is constantly changing and influenced by many factors, such as economic data, political events, news, etc. These can cause sudden and unexpected price movements, which can affect your open positions. If the market moves against your position, your account equity will decrease, and your margin level will drop. If the market moves in your favor, your account equity will increase, and your margin level will rise.
- Overtrading: Overtrading is when you open too many positions or trade with too large a position size, relative to your account size and risk tolerance. This can expose you to excessive market risk and reduce your margin level. Overtrading can also lead to emotional stress, which can impair your trading decisions and performance.
- Insufficient capital: Insufficient capital is when you do not have enough money in your account to cover the margin required for your open positions. This can happen if you withdraw money from your account, incur losses, or face unfavorable exchange rates. Insufficient capital can limit your trading opportunities and increase your margin level.
What to do when it happens
Margin call forex is a serious situation that can result in significant losses, account wipeout, or even debt. Therefore, it is important to know how to deal with it and prevent it from happening again. Here are some tips and strategies to help you:
- Close some of your positions: The simplest and fastest way to restore your margin level is to close some of your positions, especially the ones that are losing money or have a high margin requirement. This will free up some margin and reduce your market exposure. However, this may also mean that you have to accept losses or miss out on potential profits.
- Add more funds to your account: Another way to restore your margin level is to add more funds to your account, either by depositing money or transferring from another account. This will increase your account equity and your margin level. However, this may also mean that you have to risk more money or use money that you need for other purposes.
- Reduce your leverage: Another way to restore your margin level is to reduce your leverage, either by changing your account settings or opening smaller positions. This will lower the margin required for your open positions and your margin level. However, this may also mean that you have to trade with less money and reduce your potential profits.
Conclusion
In this blog post, we have explained what margin call means, how it works, why it happens, and what to do when it happens. Margin call is a situation where your broker closes some or all of your open positions because your account equity falls below the required margin level. Margin call can result in significant losses, account wipeout, or even debt if you trade with negative balance protection. Therefore, it is important to understand the concept of margin, leverage, and margin level in forex trading, and how to avoid or deal with margin call.
Margin call forex is a sign of poor risk management and leverage control in forex trading. Risk management is the process of identifying, measuring, and managing the potential losses in your trading activities. Leverage control is the process of choosing the appropriate leverage ratio for your trading style, account size, and risk tolerance. By applying effective risk management and leverage control, you can reduce the likelihood and impact of margin call, and improve your trading performance and profitability.
We hope this blog post has been helpful and informative for you. Thank you for reading and happy trading!
