A margin call in Forex is not an event a trader would wish to face, as it indicates a potential total loss scenario. It can happen when traders engage in margin trading but lack the knowledge necessary to use it properly. Before traders panic over a margin call, they must understand what it is, what happens, and how to react.
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Read this article to learn about a margin call in Forex and how to avoid receiving one by considering the pros and cons of margin trading noted below.
A Margin Call in Forex: Meaning, Calculation, and Examples
Margin trading enables Forex trading, but traders who do not understand how to trade with margin could face a margin call in Forex. It is a sign of portfolio management gone wrong with a distinct absence of appropriate risk management. Find out what happens when you receive a margin call and how you can avoid one.
What Is a Margin Call in Forex Trading?
When a broker issues a margin call in Forex, the leveraged portfolio has dipped below the margin level. It alerts traders to take swift action to remedy the problem or face forced liquidation, which occurs automatically if the account reaches the automatic stop-out level.
What Happens When You Get a Margin Call?
When traders receive a margin call in Forex, they can no longer place trades, and their trading platform usually flashes red. They also receive an e-mail to notify them about the margin call.
Traders can add capital to their portfolios to increase equity or close losing positions. Should traders ignore a margin call, and should their portfolio face further losses to the point where the margin level breaches the automatic stop-put level, forced liquidation occurs.
CFD Margin Call Example
Below is a margin call in Forex example, assuming a margin call at 100% margin level and an automatic stop-out at 50%.
Contracts for Difference (CFD) margin call example:
- You have a $1,000 portfolio
- You take several trades totaling $500 in margin
- You face losses, and your equity drops to $500, which triggers a margin call
- You take no action, and losses increase, lowering your equity to $250, which triggers forced liquidation
Please note:
- In fast-moving markets, traders can lose most of their portfolio in a short period if they fail to react to a margin call
Margin call calculation
- Margin level = (Equity / Used Margin) x 100%
Margin “Call Level” vs. “Margin Call”
A margin call in Forex can happen to any trader, but most confuse the margin call level with a margin call.
The margin call level is broker-specific. It is a threshold that triggers a margin call.
Should an account fall below the margin call level, the broker automatically sends a notification via e-mail and will display a red warning in the account. Traders cannot place new trades if their account drops below the margin call level.
A margin call is an event that can trigger another event. Initially, the broker will e-mail the trader, informing them their account dropped below the margin call level. Traders then can liquidate positions, add funds, or take no action.
Taking no action can result in a trade moving in their favor and normalizing the account or dropping to the close-out level set by a broker when forced liquidation automatically begins.
Margin Call Level at 100%
Each broker can set a level when they issue a margin call in Forex, but the industry standard is 100%, indicating a level where account equity covers the used margin. Traders should avoid a margin call at all costs.
Margin Trading– Pros and Cons
Margin trading may involve a margin call, and traders should carefully consider the pros and cons of margin trading to avoid a margin call.
The Pros of Margin Trading
- Ability to trade Forex
- Increased trading flexibility
- Possibility to control more substantial position sizes with smaller portfolios
- Magnified profit potential
The Cons of Margin Trading
- Misunderstanding the relationship between margin trading and leverage
- Absence of proper risk management
- Insufficient capital
- Outsized position sizes
- Overtrading
- Magnified loss potential
Bottom Line
A margin call in Forex is a sign of a portfolio under water, due to inadequate risk management. Traders can avoid a margin call by trading with sufficient capital, avoiding overtrading, using portfolio-appropriate lot sizes, and deploying strict risk management.
