A margin call can be a stressful experience for traders, but with the right knowledge and preparation, you can avoid it and keep your trading journey on track. In this blog, we’ll explain what a margin call is, how it works, what causes it, and how to avoid it. We’ll also share practical advice to help you manage your margin effectively, keeping your trading account safe.
If you’re a trader with White Forex, we’ll guide you through understanding the process and how to use our platform’s features to stay on top of your trades.
What is a Margin Call in Forex?
A margin call happens when the funds in your trading account fall below the required amount needed to maintain open positions. Simply put, it’s when your broker alerts you that you don’t have enough money in your account to keep your trades open.
To understand this, let’s break it down:
Margin is the amount of money you need to put up in order to open a position. It acts like a deposit or security for your trade.
Leverage allows you to control larger positions with less of your own money. For example, if you use 100:1 leverage, you can control $100,000 in the market with just $1,000 of your own funds.
A margin call occurs when your account balance falls below the minimum margin requirement for your open positions. This means that if you don't take action, your broker might close your positions to prevent further losses.
Example: Margin Call in Action
Imagine you open a trade on EUR/USD with 100:1 leverage. To control $100,000 in the market, you only need to deposit $1,000. But, if the market moves against your trade and the value of your account falls below the required margin, you will receive a margin call from your broker.
Let’s say the required margin is $800, but your account balance has dropped to $750. Your broker will notify you that you need to either add more funds to your account or close some of your positions. If you don’t act, the broker may automatically close your positions to protect both you and them from further losses.
How Does a Margin Call Work?
When you open a position in the forex market, your broker requires a certain amount of margin to keep the trade open. As the market moves, the value of your trade will rise or fall. If the market moves against you, your account balance decreases, which means the available margin also gets reduced.
If your available margin falls below the required amount to keep your positions open, your broker will issue a margin call. In that case, you’ll have a couple of options:
Deposit more funds into your account to meet the margin requirement.
Close some positions to free up margin and reduce the risk.
If you don’t act in time, the broker might step in and automatically close your positions to prevent further losses, which could end up locking in your losses.
What Triggers a Margin Call?
There are several reasons a margin call may occur. Here are the main ones:
1. Market Fluctuations
Forex markets are constantly moving, and if the market moves sharply against your position, your margin will decrease. Unexpected events like major economic news or political instability can cause big price swings, which can trigger a margin call if you're not properly prepared.
2. High Leverage
Leverage can magnify both profits and losses. Using high leverage means you’re controlling a larger position with a smaller amount of capital. While this can increase your potential profits, it also means you’re more likely to face a margin call if the market moves against you.
3. Insufficient Funds
If your trading account balance is low, you might not have enough margin to cover your positions. If the market moves against you, and you don’t have enough funds to maintain your trades, you’ll receive a margin call.
4. Large Position Sizes
If you’re holding large positions with a small margin, it increases the chance of a margin call. The bigger the position, the more margin is required to keep it open. Even a small unfavorable market movement can push you into a margin call.
5. Failure to Monitor Your Account
If you don’t regularly check your account balance and margin levels, you might not notice that you’re getting close to a margin call. It’s essential to stay on top of your account to avoid surprises.
How to Avoid a Margin Call
A margin call doesn’t have to be a disaster if you’re properly prepared. Here are some practical tips to help you avoid getting into this situation:
1. Use Sound Risk Management
Risk management is the key to avoiding margin calls. You should always have a plan for your trades, including setting stop-loss orders. A stop-loss will automatically close your position if the price moves against you by a certain amount, helping you limit your losses.
2. Don’t Over-Leverage
Although high leverage allows you to control larger positions, it also increases your risk. As a beginner or even as an experienced trader, it’s wise to use lower leverage to reduce your exposure to market movements. If you’re new to trading, you might want to stick with leverage ratios like 10:1 or 20:1 to keep things safer.
3. Maintain Adequate Funds in Your Account
Always keep more funds in your account than the minimum required to open and maintain your positions. This extra buffer will give you more flexibility if the market moves unexpectedly.
4. Use Margin Alerts
Many brokers, including White Forex, offer margin alerts that notify you when your account balance is getting low. Setting up margin alerts will give you enough time to take action before a margin call occurs.
5. Diversify Your Trades
Spreading your investments across different currency pairs or even other assets can reduce the risk of a margin call from a single adverse market move. This way, if one position goes against you, other positions may offset the losses.
6. Monitor Your Account Regularly
Make sure to keep an eye on your margin level, especially during periods of high market volatility. Checking your account regularly can help you stay on top of any potential issues before they become a problem.
What Happens After a Margin Call?
When you receive a margin call, you have a few options:
1. Deposit More Funds
You can deposit additional funds into your account to bring your margin back up to the required level. This will allow you to keep your positions open and avoid liquidation.
2. Close Some Positions
If you don’t want to deposit more money, you can close some of your positions to free up margin. This can help you meet the required margin and avoid a margin call, though it will lock in any losses from those closed positions.
3. Automatic Liquidation
If you don’t act in time, your broker may automatically close your positions to bring your account balance back into the required margin level. This can lead to significant losses, particularly if the market moves quickly against your positions.
Margin Call vs. Stop-Out Level: What’s the Difference?
It’s important to understand the difference between a margin call and a stop-out level:
Margin Call: This is a warning that your margin is too low. The broker will give you a chance to deposit funds or close positions to avoid further action.
Stop-Out Level: This is the point at which the broker will automatically close some or all of your positions to prevent your account from going negative. The stop-out level is typically lower than the margin call level.
Conclusion
Margin calls are an inevitable part of forex trading, but with the right approach, you can minimize the risk of encountering one. Understanding how margin works, using proper risk management, and keeping a close eye on your account balance are essential steps in protecting your capital.
At White Forex, we provide our clients with the tools and resources to stay on top of their trades. With features like margin alerts and risk management tools, we help you ensure that you never get caught off guard by a margin call. By using leverage wisely, monitoring your positions, and being prepared for market fluctuations, you can trade with confidence and avoid the stress of margin calls.
FAQs About Margin Calls
What is a margin call in forex? A margin call is a notification from your broker that you don’t have enough funds in your account to keep your trades open. It happens when the value of your account falls below the required margin level.
How can I avoid a margin call in forex? You can avoid a margin call by using proper risk management strategies, maintaining sufficient funds in your account, avoiding over-leveraging, and setting up margin alerts.
What happens if I don’t respond to a margin call? If you don’t respond to a margin call by depositing more funds or closing positions, your broker may automatically close your trades to bring your account balance back to the required level.
What is the difference between a margin call and a stop-out level? A margin call is a warning that your margin is too low, while a stop-out level is the point at which the broker automatically closes your positions to prevent further losses.
How can I check my margin level with White Forex? You can easily monitor your margin level through the White Forex trading platform, which provides real-time updates
