Missing a Margin Call or not knowing what to do when you receive one can result in the immediate closure of all active positions in the market, and as the positions are closed, your losses can be exacerbated abruptly.
Any forex trader understands the importance of avoiding margin calls for a period of time, and it is, of course, against their habit to do so. However, in order to prevent such a predicament, a trader must be aware of what it is and how to avoid it. In this essay, we will go over all there is to know about Margin Calls from an ECN Broker In Forex Trading and how to prevent them.
What Is A Forex Margin Call?
A Forex Margin Call is an alert sent by the forex broker to the trader indicating that the funds in their account are now less than the minimum amount required to keep a currency position open. If no more money are added during the next two to five days, all open positions will be automatically closed.
A Margin is a defined percentage of an investment that a trader must keep in their account at all times in order to trade with Margin.
Calculating Forex Margin Calls
Assume you start a Margin account with $20,000 in the account, half of which is borrowed from the broker and the other half is your own funds, and the Margin requirement is 30%, indicating that your account must always have 30% of $20,000 = $6000 at all times. Now, if you want to trade USD/EUR and buy 20000 units at a rate of one, a 40% reduction in investment value would result in a total amount of $12000, so the new Margin need would be 30%*$12000 = $3600.
At this time, the amount borrowed from your broker will remain the same, while your personal money will decrease to $2000, falling below the 30% Margin requirement.
Unless and until you deposit $1600 in your account by commencing a process or liquidating a portion of your positions, you will receive a forex Margin call.
When you directly deposit money into the trading account to meet the margin requirement, the amount must be equal to the required forex margin call amount. Likewise, when you sell currency pairs to pay the required margin call, the number of pairs you sell must equal the required margin amount divided by the minimum maintenance requirement.
In our example, you must sell the total value of currency pairs to meet the Margin is = $1600/0.3 = $5333.34.
Why does a Margin Call Occur?
Forex margin calls occur when there are no longer any usable money inside the required Margin limit, and repeated losses might result in a Margin reduction. When a trader invests more than the useable Margin, there is usually little room to manage risk efficiently because you can lose much more money than you first invested.
When your account is underfunded, you are compelled to overtrade with little available margin, which results in Margin Calls. Furthermore, holding onto a lost transaction or falling currency pair for an extended period of time depletes your available Margin, increasing the likelihood of a Margin Call.
Furthermore, when an account is over-leveraged, it might be difficult to return the principal and interest amount, which can result in a downward spiral of losses, depleting the Margin and resulting to forex Margin Calls.
Finally, when trading a currency pair without stop-loss and limit orders, aggressive price moves in the opposite direction might result in big losses, reducing the Margin and resulting in a forex Margin Call.
Consequences Of A Forex Margin Call
Margin calls force the broker to become trapped in the deal and unable to trade due to insufficient cash in his trading account. This situation is equally bad for the broker because, as the trader’s broker, he is also able to bear the loss. As a result, many traders are and should be aware that, while leverage trading might be profitable to them, it can also cause them to fall into the debt of their broker. It means customers may have to pay the broker more money than they have in their accounts.
When a trader receives a forex Margin Call, all positions can be sold without the trader’s approval. If the trader fails to add funds to their account to match the Margin, the brokerage house can levy fees, commissions, and interest on the unpaid amount.
Furthermore, the broking house becomes the only decider of which positions must be liquidated, and no clearance from the trader is required, therefore the broking company may not allow the trader to borrow on Margin again until and until they meet the Margin requirement.
Avoiding Forex Margin Calls
Every trader should be aware that the risk involved in trading with leverage is extremely large, which means that if a winning trade occurs, the trader will be able to retain a healthy margin in his account. Here are a few pointers to help you avoid margin calls in forex.
Leverage refers to the use of borrowed funds to increase one’s trading risk, and the more leverage you employ in your account, the less Margin is available to absorb potential losses. Over-leveraged bets swiftly deplete cash due to increased losses.
Keep Margin free
You should always have enough Margin in your account to trade larger positions since free Margin is computed by subtracting the total Margin of the open positions from the entire equity. As a result, the bigger your free Margin, the less likely it is that it will be depleted to the point of receiving a forex Margin Call.
Apply risk management strategies.
Stop loss and limit orders can be used to manage risk and prevent forex Margin Calls when trading, since when you start trade positions and set the stops, you assure that if the position falls below a specific threshold, you will exit the trade by just absorbing as much loss as your risk tolerance permits.
Margin calls are more likely to occur when traders commit a big percentage of their equity to utilized Margin, leaving little room for losses to be absorbed. From the broker’s perspective, this is a crucial tool for properly managing and reducing risk. To avoid Margin Calls, it is critical that you consistently maintain the appropriate Margin in your trading account.
1. What happens when I receive a Forex Margin Call?
When you receive a Margin Call, you have two options: deposit more funds into your account to increase your margin level or close out some or all of your open positions to reduce your margin usage.
2. What if I don’t meet the Margin Call requirements?
If you fail to meet the Margin Call requirements by depositing additional funds or closing positions, your broker may forcibly close out your losing positions (a margin call liquidation) to prevent further losses.
3. Are all brokers’ Forex Margin Call policies the same?
No, broker policies regarding Margin Calls can vary. It’s important to understand your broker’s specific requirements and policies regarding Margin Calls, as they may have different margin levels and rules.
4. What is the best way to manage Margin in forex trading?
The best way to manage Margin in forex trading is to have a well-thought-out trading plan, use appropriate risk management techniques, set stop-loss orders, and avoid excessive leverage. Additionally, continuously monitor your account to ensure you maintain a healthy margin level.
5. Can I trade without using Margin?
Yes, you can trade without using Margin by using a “cash account” instead of a margin account. In a cash account, you can only trade with the funds you have deposited, and you won’t be able to leverage your positions. This can help you avoid margin-related risks altogether.