If you ever get a margin call, and I think there is no trader that did not get at least once, it means you are learning how to trade on Forex.
Margin call is a last call for you to wake up and protect your money from being wiped completely from the market.
What is the meaning of a margin call, how the margin call in Forex works and how to prevent happening to you?
This article will clarify all those questions so stay tuned and read. There are examples for you to clarify all what is happening when the margin call is activated.
What is a Margin Call in Forex
Margin call in Forex is something you do not want to happen to you. Margin call means you will be removed from the market very soon if you do not do something.
What you can do to prevent margin call when is near to activation is to increase your account balance. There are few ways how to prevent margin call but for now I will explain margin call in Forex in more details.
Read further this article and you will find what to do to prevent margin call.
I will show you examples how margin call in Forex works and how margin call happens while trading on the Forex.
Everything is connected with the trades you open. If your trades are positive, meaning you are making money and not losing money, you will not have a problem with margin call.
Margin call happens only when you have losing trades that are eating your account balance.
What Does Margin Call Mean in Forex
Margin call in Forex means calling you to increase your free margin to sustain open trades. To sustain open trades means cover losing trades because margin call is active only when you have losing trades that eats your free margin.
Free margin is the amount of money you have left when you reduce margin level from the current equity.
If you want to know more about free margin you should read the article what is free margin in Forex.
Margin call means you do not have equity on your account balance because your trading decision were not correct.
Margin Call Example
I have put one example of margin call here to explain how does the margin call works.
Images below shows a process from the time you open the order and until that order is closed due to margin call.
My order examples have $100 account balance, leverage 1:100 and lot size I can open is 0.05 lots.
First image shows how does the Metatrader 4 platform looks like when a new order is open.
Current status is that I have new order open with 0.05 lot size. My free margin is $10.82 and margin that is set aside by the broker is $88.08.
When I sum margin and free margin I will get equity amount, which is $98.90.
My equity is not $100 because current open order is in minus for $1.10.
Open New Order
I have tried to open new order with 0.01 lot size just to speed up process of getting margin call.
Margin call is usualy visible when you have too much orders open. When you have too much orders open then you do not have space for your account balance to sustain the losing trades.
In this case, my free margin is too low. It is $10.62, which means I have left $10.62 to spent or to use to cover the loss of the current trade that is open.
While I have tried to open new order and spent that free margin, $10.62, my broker does not allow me to do that. He wants to leave that free amount for the trade I have open.
I cannot open new trade so I will leave that free margin money for the trade that is open and I will see what will happen.
In this example I am trying to get margin call to show you what happens. I want that my trade become losing trade.
Now I am waiting for the price to fall down because I have open buy order. If the price fall down it will be price move against me and my minus will increase.
As the time passes my trade is losing trade and the minus on my trading account is increasing.
You can see that my free margin is now on $2.57 which is lower than previous $10.62.
While my free margin is positive there is no problem for me or for my broker.
Free Margin Negative – Margin Call Close
The price has fall down more and my minus has increased. Negative trading balance is eating my free margin and now it is negative. I am in minus for $4.28 more on free margin.
That is not good and soon I can expect that broker will warn me that my margin is low and I can expect that the order will be closed.
Margin call will not be activated immediately when free margin turn from positive to negative.
Margin call will be activated later on when negative balance on the current open order increases.
While my account balance and equity is large enough I can sustain large loss on this trade.
Margin Call Activated
As you can see my open order has closed due to margin call. My trade that was open has closed with -$56.05.
That is pretty large loss on one trade. 50% of my initial account balance. In order to save the account balance from larger loss, broker has activated margin call that closed open trade.
This way I have not lost all my money on the trading account. I can now open new order and try to regain my lost money.
Margin Call Example – Conclusion
The example above is one simple example how margin call is activated when you have order or orders open that are losing one.
When the loss on the open order becomes too large, broker will activate margin call in order to protect you and your account.
Your job is to protect your trading account from this scenario. You should minimize your bad trades and minimize the risk you are taking on each trade.
My example did not had any stop loss which is bad decision, but in order to show you margin call this was needed.
How to Prevent Margin Call
To prevent margin call on your account you should first watch out on your free margin. Do not let free margin drop to zero or you will be closed with all open positions.
If you watch out on the free margin then you have two ways of preventing your free margin becoming zero:
- use proper lot size
- do not use large lot size so you do not lose free margin in just few pips
- use stop loss
- set stop loss inside free margin range
- do not set stop loss so it is larger than the free margin you have
The easiest way is not to open large lot size. That way you can sustain large market move with several hundreds pips and still be in green.
Margin call should be avoided each time you trade on the Forex. By protecting yourself from margin call you are protecting your money.
Without money you will not be able to trade on the Forex and to make money.
Margin call is last chance to save you from your losing trades. You should avoid margin call by setting stop loss that will minimize the loss on each trade.
Even though margin call will close your trades on some level it is not smart to leave margin call as a last chance because margin call will close your trades with pretty large loss.
The time and energy you will need to spend to regain lost money with margin call will exaust you or force you to make even more bad trading decisions.
Being smarter by reading all about Forex trading basics can help you become more confident and prepare for trading.