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“No trader willingly receives a margin call as it is an initial warning sign that things are going badly.”
In a market as risky as forex, nightmare situations are not rare — especially when you don’t have any risk management strategies put in place. Margin calls make for a good example of such situations: traders hate them, and they actively try to avoid them. But what exactly are margin calls and why should you try to avoid them? In this article, we explain everything you need to know.
Jump to a Section
- What Is a Margin Call?
- What Happens When You Get a Margin Call?
- Example of a Margin Call
- Why Are Margin Calls Bad?
- How Can You Avoid Getting a Margin Call?
- Final Thoughts
What Is a Margin Call?
A margin call is an alert, or notification, that your broker sends you when your margin falls below a certain level. This is a kind of warning alerting you that your positions will be closed off if your margin continues to fall.
To rewind a little bit, remember that margin is the amount of capital you deposit to open and maintain a position. When trading leveraged products like forex, there are 2 types of margin:
Deposit Margin: The minimum amount of capital you need to deposit in order to open a leveraged trading position.
Maintenance Margin: The minimum equity you must maintain in your account to keep an open position.
A margin call is triggered when your maintenance margin runs low. As for the level at which you receive this call, it depends on the broker you trade with. For example, at XM, we alert you as soon as your account equity drops below 100% of the margin required to maintain your open positions.
What Happens When You Get a Margin Call?
When you get a margin call, you are alerted that your positions will be automatically closed if your margin level continues to fall. This is called a stop out. To avoid getting a stop out, you’ll need to either deposit more funds to bring your account back to the required margin level, or close some positions to reduce the amount of margin being used.
Example of a Margin Call
Let’s say you open a forex trade by buying 1 mini lot of EUR/USD with a leverage of 1:10. The margin requirement for this trade is 10%, meaning you need $1,000 in your account to control a position worth $10,000. Your broker’s maintenance margin requirement is 50%, which means your account must maintain at least $500 in equity to keep the position open (otherwise, your broker will initiate a stop out).
Now, suppose the market moves against your position and your account equity drops from $1,500 to $1,000. You still have just enough to cover your required margin. But suppose the price of EUR/USD drops even further and your account equity becomes $800.
Since your equity has dropped below 100% of the maintenance margin, your broker issues a margin call. At this point, you’ll either need to deposit more money to restore your margin balance or close some positions to free up margin. If you don’t act, and your account balance falls below 50% of your maintenance margin (in our case $500), your broker will initiate a stop out and close your position automatically to protect you from further losses.
Why Are Margin Calls Bad?
Margin calls can be problematic for several reasons. For one thing, they are a warning of unexpected liquidation. If you don’t act quickly, your broker can automatically close your trades, often at unfavourable prices. They also typically occur when the market moves against you, at a time when you are already facing losses. We can consider them as a sign that your account is undercapitalised for the positions you are holding. In addition, receiving a margin call can emotionally affect you and add to your stress, forcing you to make quick decisions on the spot.
How Can You Avoid Getting a Margin Call?
Avoiding getting a margin call is synonymous with keeping a healthy forex account. There is no shortcut or cheat code that stops margin calls. Ultimately, you need effective risk management strategies and to be disciplined in your trading approach:
- Avoid trading with extremely high leverage ratios as small price movements can greatly affect your positions.
- Keep an eye on your margin level — this is a metric that shows you how much of your account equity is tied up in open trades relative to your entire account balance. The higher your margin level, the healthier your account.
- Adopt strategies like the 1% or 2% rule where you use no more than 1-2% of your account equity on any single trade.
- Monitor your open trades regularly.
- Use stop loss orders to limit your loss.
- Keep your trade sizes small to control risk — do not be overconfident in your trades.
Final Thoughts
A margin call is a notification that your broker sends you when your account equity falls below the required maintenance margin. If you do not deposit additional funds to bring your account back to the required level, or close positions to free up margin, your broker may trigger a stop out and automatically close your trades to prevent further losses.
No trader willingly receives a margin call as it is an initial warning sign that things are going badly. However, margin calls can be avoided if you are disciplined in your trades and pay attention to your margin levels. Avoiding high leverage ratios, using stop loss orders and adopting strategies like the 1% rule help keep your risk to a minimum, allowing you to keep a healthy account and reduce your probability of getting a margin call.
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