When there is insufficient balance to cover losses, the broker or exchange issues a Margin Call warning. In this situation, the user must either add margin or close high-risk trades to return the account balance to a risk-free state and avoid a stop-out.
What is Margin Call and How Does It Happen?
Contrary to popular belief, a Margin Call in the forex market does not mean the loss of a trading account. When the account approaches critical conditions, a message is issued by the broker to take necessary actions to prevent a Stop Out.
Some of the key concepts affecting Margin Call include:
- Balance: The funds deposited into the account and available for trading;
- Leverage: Borrowing money from the broker to conduct trades larger than the actual balance of the account;
- Margin: The amount that the broker deducts and locks from the account balance as collateral for the trade;
- Margin Level: Shown as a percentage, it reflects margin relative to open positions, assessing risk and position sustainability;
- Equity: Equity is The real-time balance of the account, including profits or losses from open trades;
- Stop Out: When the balance can't cover open trade losses, trades close automatically, triggering a Stop Out.
Signs of Approaching a Margin Call
A Margin Call occurs when the trader's account balance decreases to a level where it can no longer cover the losses of open trades.
In this case, the broker issues a warning to deposit more funds into the account to cover further losses.
Decrease in Margin Level to Critical Levels
When the Margin Level reaches a critical point, it indicates insufficient funds to cover the losses of open trades. In fact, a Margin Level of 100% indicates that the funds to cover the losses of open trades are running out.
Receiving a Warning from the Broker
When the Margin Level reaches a critical level, brokers warn about insufficient funds to cover losses. In this situation, by increasing the account balance, the Margin Level moves away from the critical level, and the account returns to normal.
However, if the account balance is not increased and losses continue to grow, the broker closes all open trades, and a Stop Out becomes inevitable.
Ways to Prevent a Margin Call
Following a few simple principles can reduce the likelihood of a Margin Call. A Margin Call is merely a warning for the user to manage the losses of open trades.
Ways to Prevent a Margin Call:
- Capital Management: By adhering to capital management in all trades, the likelihood of a Margin Call is reduced;
- Using Appropriate Leverage: High leverage boosts profit potential but also increases losses;
- Emotional Management: Controlling emotions during critical moments prevents irrational decisions leading to a Margin Call.
Ways to Exit a Margin Call Situation
Taking necessary actions to manage capital when receiving a Margin Call warning from the broker or exchange makes it possible to exit the critical state and preserve capital.
- Reducing Trade Volume: Closing high-loss trades or partially closing profitable ones raises the Margin Level, reducing Margin Call risk;
- Increasing Account Balance: Depositing funds raises the balance, increasing the Margin Level and exiting the Margin Call zone;
- Hedging Trades: Floating losses and the Margin Level remain stable by opening a trade in the opposite direction.
Conclusion
By reducing trade volume, selecting appropriate leverage, and using stop-loss orders, one can prevent approaching the Margin Call level.
Solutions such as increasing the balance or hedging trades can prevent a Stop Out if faced with a Margin Call.
