There are 3 main ways to avoid margin call in forex. A margin call is every trader’s nightmare.
You receive a marginal call when your trade margin is equal to your account balance or used up.
It simply means, you no longer have enough money on your account to hold positions and your broker is at the verge of closing out your positions.
In this case, you are likely to receive a call from a broker.
Your broker instructs you to either deposit more money on your account to maintain the required margin to continue trading or he closes off your open trades.
3 ways to avoid margin call in forex.
- Stop holding on to a losing trade for long/greed depletes usable margin
- Avoid Over leveraging your account
- Stay away from using small capital accounts which force you to over trade with too little usable margin.
How does Over leveraging cause quick Margin calls
No leverage scenario
Suppose, you are holding an account of $10,000.
In case you trade USD/CHF going long at 0.1 lot size risking only 2% on your account. If your stop loss is 100 pips and a trade happens to fail.
Used margin = $200.
Each pip movement is equal to $1. This means when the trade closes at the trigger of the stop loss you will only lose $200.
With leverage.
If you are required to contribute 1% margin to trade $50,000 position having an account of $10,000. Leverage ratio 50:1 each pip moved is equal to $50.
For 100 pips stop loss, the loss would be (100×50) =$5000 which is half your account.
Too much leverage can cause unnecessary draw downs and can wipe off your account just in a single trade.
That is why over leveraging leads to quick margin calls.
Leverage is good and at the same time bad. If you use leverage, ensure tight risk management measures. This way you will profit from trading and last long in this game.
Usable margin and %ge usable margins.
Usable margin = free margin
The amount of money available on your account that you can use to open up new positions.
Free margin = Equity – margin
When your equity falls below the margin or is equal to the margin, you will receive a margin call from your broker.
Example,
If your required margin is $1000. And your account balance is $10,000.
Unfortunately your trade didn’t go as predicated. You have a loss of $9000.
Remember, you took the trade at $1000 margin. This means your equity is now equal to $1000 equal to your required margin.
In this case, you have no free margin therefore can’t take more trades.
Other wise to add more position, you will have to add more money to your account. Or else, any of your trades has to turn around to profits to redeem your chances.
If it continues to go against you, you will receive a call from your broker requesting you to either add more capital to your account.
Unless you do that, your open trades will automatically close down one by one starting with the biggest losing trade until you are closed out of the market.
The process of closing out losing positions due to lack of enough capital on your account to run open trades is known as stop-out.
Stop-out level
When your equity falls below the margin level and reaches as low as 5%.
The system starts to close your losing open trades automatically starting with the biggest losing position.
Every time a losing trade closes, you will realize that the equity value increases. This is because the amount that was held as margin for the closed trade is now released.
When the trades continue to go against you, more trades will close as long as your equity and your margin level reaches 5%.
Or else you will have to deposit more money if you want to keep your trades running.
You can only avoid this night mare if you trade with a stop loss always!
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