For anyone who entered online trading in the forex market at the initial level, you must have heard the term ‘margin call’. But why is it significant, and what does it mean? A margin call in forex is a message from your broker when your trading account has not met the required margin on your trading positions.

This often happens when the market is moving against you. This is crucial to learn if you are using a particular trading platform for instance Meta Trader 4. If you intend to trade forex, or CFDs in particular, then learning about margin calls is an important aspect of preserving your money.

What Does the Term Margin Call in Forex Trading Mean?

In forex, a margin call occurs when the balance in your account falls below the necessary margin. This is your broker’s code for your balance being low, and you should do something about it. In trading, you buy or sell currencies in the forex market using borrowed funds that allow you to trade more than your account balance.

So, let’s assume you are trading in EUR/USD where your position depends on a high amount of leverage. Now, if the market turns in your favor, you get to make a profit out of it. However, the other way is just the opposite where when you lose, your loss increases faster. If your available balance within the account, known as equity, falls too low, your brokerage will send a margin call.

This means you must either:

1. Deposit more money into your account.

2. Margin some of your trades to give way for others.

If you do not take action then the broker may get your trades closed to avoid more unfavorable risk scenarios for themselves. This process is called “stop out”.

What Causes a Margin Call?

Margin calls happen for several reasons:

• High leverage: While leverage is a way to enhance trading capacity it also induces volatility.

• Volatile markets: Fluctuations in price can open the door for terrible losses on your account.

• Overtrading: Having too many positions can help expand the available margin with you.

• Ignoring stop-loss orders: Lack of stop-loss orders always results in overspending catastrophes.

How to Calculate Margin Calls in Forex?

When trading it is essential to acquaint oneself with tools to measure this call to enhance the trading account capacity.

Here’s how to break it down:

Step 1: Understand Key Terms

1. Equity: It is your account balance as well as any profit or losses that have not yet been realized.

2. Used Margin: The portion of your money that is required for maintaining the position open.

3. Free Margin: For every broker and trader this is the fund available to make new trades or for situations where you might have a loss.

Step 2: Use the Margin Level Formula

The margin level is calculated as:

Margin Level=(Equity/Used Margin)×100

Example: Suppose you have a $1,000 account balance and open a $10,000 trade with 1:50 leverage. The required margin is $200.

If your trade is a $800 loss trade, your equity shrinks to $200. At this point:

Margin Level = (200/200) × 100 = 100 %

You’ll get a margin call because your equity matches your used margin.

How to Prevent Margin Calls in Forex?

Here are some of the ways through which you can prevent margin calls in forex:

1. Use Stop-Loss Orders

This tool is used when you let your broker close your trade once it has reached a certain level of loss known as a stop-loss order. This helps to avoid some little losses to develop into large ones.

2. Trade with Low Leverage

High leverage let alone enhances the potential rewards but also exacerbates risks. Stick to lower leverage, such as 1: 10 or 1:20 is recommended especially to the user who is starting with the system, besides there is no restriction to the number of times.

3. Monitor Your Trades Regularly

Watch out for your trades when the highs and lows are frequent. MetaTrader 4 WebTrader has real-time information feeds so that you don’t feel in the dark.

4. Avoid Overtrading

Avoid the opening of too many trades at a particular time. Overtrading results in wiping out your account balance, receiving margin calls, or both.

5. Maintain Some Additional Amount in Your Account

Keeping funds in your account means that you cannot be called for margin when there are big movements in the market.

6. Choose a Reliable Broker

A good broker, like FXcess, has the tools which can be utilized in the risk control. It is fairly easy to use and offers information by which you can assess your margin status.

7. Educate Yourself About Forex

Foreign exchange crisis is complicated and thus calls for continuous learning in this market. Familiarize yourself with trading models, trends and simulate the use of real capital before using actual funds.

Conclusion

A margin call in forex is a very important topic that any trader should get to learn about. It helps to prevent more losses in the account and that calls for a change of strategy in trading. By developing sound risk management approaches you can avoid margin calls and trade more accurately. Using platforms such as FXcess, make it easier to monitor one’s account and trades.

FAQs:

1. What does a margin call in forex trading mean?

A margin call is the state when an equity amount in an account falls below the required margin and funds must be added, or trades closed. It’s basically a message that your account is vulnerable and you do not have adequate balance to support it.

2. How can I avoid margin calls?

Use stop loss orders and trade with low leverage. Ensure you regularly check on your account so as not to receive constant margin calls. It is important in the planning process and setting up a bit of a safety in the form of account balance.

3. What makes using leverage a risky affair when participating in forex trading?

Leverage means you invest with more money than the capital you actually have and this causes both gains and losses to be higher than using one’s own funds. This means that high leverage can be very risky and you lose your money very much if the market turns against you.

4. Are margin calls common in CFD trading?

Yes, margin calls are natural in CFD trading because the financing is combined with high leverage and fast price fluctuations. To avoid them it is advisable to be careful with leverage and such features as stop-loss orders.

Disclaimer:
This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. FXCess is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication