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Any trader who has been in forex trading will know the importance of avoiding the margin call for some time. Of course, it is in their practice not to stay away from the margin call. But, to avoid such a situation, a trader must be aware of what it is and how it can be avoided. Therefore, please read this article to have a clear view of Margin Call in forex and trade to prevent it.
What is a margin call in trading?
Margin call represents a warning in the trading platform that warns investors when the balance falls below the minimum allowed value, below margin account value. Investors need to deposit additional money into the trading account or they can sell some of the assets held in their account if they want to continue trading.
A margin account is a loan cash investment account with a broker which can be used for share trading. Using a margin account, the broker lends the investor cash to purchase stocks or other financial products (forex, commodities, crypto etc. )
The Concept of Margin and Leverage
Margin and leverage go hand in hand when it comes to trading. And from a trader to have a clear understanding of the margin call, he must have a proper understanding of the terms margin and leverage.
Margin: Just like the name, it is the minimum value of cash or liquid fund that a trader must have to indulge in a leveraged trade.
Leverage: A friend to many traders, leverage helps the traders trade in the market with the help of borrowed funds without bringing in the whole amount of their own funds. This provides them with great exposure to the financial market.
Leverage comes with greater risk. And greater risk means either greater losses or greater profits. There is nothing in between. So, while trading with leverage, the trader must be aware of the accompanying risk.
Causes of Margin Call in Forex Trading
When a trader trades, the broker helps him set an acceptable level of funds to be maintained at all times. This minimum level of funds is known as the margin. When this margin falls below the previously determined level or the trader does not have any usable fund in the account, it is known as the margin call.
This situation arises when the trader faces more losses than expected. Also, when the trader does not have enough funds, that could help soak up the losses. These unforeseen losses reduce the trader’s funds, and as a remedy, the trader needs to put more funds into their account.
Following are the possible causes of Margin calls:
- First, when the trader’s account does not have enough funds to support their trade planning, that may be higher than the margins.
- Sometimes the traders, even after realizing that they will lose a trade, hold on to it and end up exhausting their margin.
- Trading is uncertain, and the price action can get very aggressive. If the trader does not use stops in such a case, he may end up draining the margins.
- Another possible cause of margin call can be over-leveraging.
What Happens When a Margin Call Takes Place?
Margin call causes the broker to get stuck in the trade. He can no longer trade due to insufficient funds in his trading account. This situation is equally awful for the broker because, as the broker to the trader, he is also able to face the loss. Many traders are and should be aware that as much as leverage trading is beneficial to them if gone wrong, it can make them fall into the debt of their broker. It means they may have to pay the broker more, apart from what they have deposited in their accounts.
How to Stay Away of the Margin Calls
Every trader must be aware that the risk involved while trading in leverage is quite high. This means that if there is a winning trade, it will help the trader to maintain a healthy margin in his account. Also, this leverage will not use up his margin. On the other hand, if the trader losses an over-leveraged trade, it can exhaust the trader’s account in a concise period. This is when the traders receive the margin calls. And to avoid such situations, ‘stop loss’ can help the trader to a great extent.
Following are some of the ways a trader can avoid the margin calls:
- Do not over trader. Try to keep a healthy margin to avoid margin calls. These margins must be enough to cope up with any losses that might occur in the future.
- Over-leveraging can be very unhealthy for the trader’s account. One unexpected movement in the market can exhaust all the accounts of the trader. So, a trader must keep the leverage by the account balance.
- Smaller trades can also help the trader to stay of the ‘margin call’ situation. It will help them maintain a healthy gap between the margin and the possible losses.
- The trader must always keep in check the risks involved. These can be done with the help of stop-loss signs.