#9: What is a margin call
Lesson 9
What is a margin call
A Margin Call occurs when:
The value of your positions and remaining capital is not enough to meet your margin requirements.
So your broker alerts you to inject more capital into your trading account to keep the trades open.
You might be scratching your head and wondering:
“How could I even get myself into this situation?”
Well, it’s because your trades have gone against you too much due to leverage.
Let me explain…
Example:
Let’s say your account has $5,000.
You long EUR/USD that costs $100,000 and Margin required is $1,000.
Since you’ve opened this trade, that $1,000 becomes “locked in”.
Your Margin available is now $4,000.
Next, you also long GBP/JPY that costs $400,000 and Margin required is $4,000.
You have no Margin available now since you have “locked in” $5,000 Margin.
So if those trades go against you…
The value of your account is less than $5,000 but, your margin required is $5000 (so there’s a shortfall).
Your broker will request you to top up your account so that your account value is back to $5,000.
Alternatively…
You’ll have to close some of your open positions (most likely at a loss).
This allows you to “unlock” some Margin to support your other open trades.
So, how can you avoid a margin call?
When you get a Margin Call, there are 2 possible outcomes:
- Inject more capital into your account
- Close your open positions (most probably at a loss)
But both outcomes are crappy, isn’t it?
So…
If you don’t want to reach the threshold of getting a Margin Call, you must do these:
- Always use a stop loss
- Don’t use the maximum leverage that’s available
- Risk 1% of trading capital per trade
Let’s say your account size is $10,000.
The risk you can take per trade is 1% * $10,000 = $100.
So you’ll close a trade when it goes against you by $100.
You can use a stop loss order to automatically close your losing trade.
If you want to learn more, then check these out:
• Forex Risk Management and Position Sizing (The Complete Guide)