What is Margin Call in Forex?
In order to understand what margin call means in forex, you need to know some of the other margin terms.
Margin is the small bit of capital that a broker sets aside in order for a trader to open a position.
Margin can be seen as a deposit or insurance, the minimum amount of money your broker requires in order to open a leveraged position.
The required margin is basically the amount that will need to be set aside as a deposit.
The required margin is determined depending on the margin requirement your broker sets, which is a percentage figure.
Used margin is the total of all of a trader’s required margins.
This means that used margin is essentially the amount of money you’ve deposited in order to keep all of your current trades open.
Usable margin, or free margin, is both the:
- amount of money available to a trader to open new positions and
- the amount of money that existing positions may move against a trader before they receive either a margin call or a stop out.
So, what exactly is a margin call?
A margin call is when a broker requires a trader to deposit more money into their account to be brought up to the minimum value needed to continue trading.
A margin call happens in forex trading when you don’t have any free margin.
So, basically, a margin call is not something any trader wants.
Trading with leverage can be great since it allows you to open trades that you might not have the funds to otherwise, but there are obvious downsides as well.
A margin call occurs when losses deplete your account past an acceptable level, determined by your forex broker.
It’s important to educate yourself on margin calls so that you are aware of how to avoid it.
Causes of Margin Call in Forex
Some of the typical causes of a margin call include:
- Maintaining a losing trade option for too long, causing a depletion of usable margin.
- Over-leveraging your forex account, and then remaining in a trade for too long.
- Not having enough funds in your account, forcing you to trade with little room for error.
- Trading without the use of stop-loss orders.
As a forex trader, it’s important you avoid any of these common mistakes to ensure your success.
How To Avoid Margin Call in Forex
Here are the ways in which a trader can avoid a margin call in forex.
- Abstain from over-leveraging your forex trading account, and reduce the amount of your effective leverage.
- Engage in proper risk management and make use of stop-loss, in order to reduce your losses.
- Make sure you have enough free margin in your account so that you may trade and open positions freely. (A common recommendation is to use only 1% or less of your accounts equity for a single trade, and less than 5% of equity on all current open trades).
- Simply trade with less money- no reason to go crazy. Better safe than sorry.
What is Margin Call Level in Forex? What is Margin Level?
It’s worth it to note the difference between margin call level, margin level, and margin call in forex.
The margin call level occurs when the margin level reaches a certain level.
Margin call level is typically determined by the forex broker.
Margin level is a percentage representing Used Margin vs Equity.
Margin level allows a trader to know how much funds are available to use for new trades.
The more margin level a trader has, means they have the more available free margin.
If you have no current trades open, your margin level will be at zero.
When margin level is low, this is when margin calls can occur.
This picture gives an example of a 100% margin call level, which is the most common level set by forex brokers.
Margin Level Formula
Margin level is calculated with the following formula:
Obviously, you will probably not need to calculate the margin level yourself.
Your broker will automatically have the value displayed for you.
Margin Level Example
Let’s say, for the sake of this example, you have $10,000 in your forex trading account.
At the moment, you have a losing position– your margin is $1,000.
Unfortunately, your position is going against you all the way to a $9,000 loss.
Now, you have $1,000 equity (10,000-9,000) which just so happens to equal your margin.
So, the margin level is 100%.
Typically, brokers set the margin call level at 100%.
This means you are now unable to open any new positions.
Margin call level actually works in your favor- if you were not automatically pulled out of this losing trade, you could continue losing lots of money, ultimately leading to you owing to your broker.
The margin call level prevents disaster.
Margin Call Level Calculator
Sometimes your online broker may not always display the information you need.
If you need to calculate your margin call level, you can do so simply with this margin call calculator.
The calculator’s rules are simple enough:
Once you input all the necessary data, this calculator will output your results.
Note: This calculator only works to show you the exchange rate that would result in a margin call, depending on your account, and tells you how much you would lose.
Learn to Trade Forex
Learning about margin calls is great if you are new to forex or still don’t understand all of the common definitions and terms.
If you are doing your research and learning all that you can about forex trading, then you are on the right path to success.
That said, reading about forex will not actually teach you how to actually make forex trades. When it comes to this, simply reading won’t help much- you need to learn how to implement a proper strategy.
If you are a beginner to forex and want to learn more about how to make profitable trades day in and day out, then investing in a course is the way to go.
If you’re ready to take your trading to the next step and join the rest of us who are making high 6-figure salaries a year solely from forex trading, check out our post about how you can learn to trade in just a few weeks.
Also, if you haven’t already, make sure to get your Free Intro to Forex Trading PDF– check out the sidebar to the left of this post to get your copy sent straight to your email today.