Margin Calls and Forex Trading

The forex market stands out as the one market that has the highest volatility. The reason for this is the fact that it involves different currencies and the liquidity is very high. Investors will usually make very big profits in just a few seconds but they might also lose the same amount just minutes later. If a trader will lose money then the account equity will fall under the margin that is required in order to maintain an account. The broker will thus be alarmed and be faced with the possibility of losing money. Brokers will then call investors in order to raise margin accounts to the margin decided as a minimum. This can only be done by depositing extra founds. When a broker does this we say that it was a “forex margin call”. It is also known in the market as a “fed call” or a “maintenance call”.

Calculation of Equity and Usable Margin in Forex Margin Calls

Whenever traders open margin accounts leverage is used in order to trade. Every broker will decide upon the limits required. Margin stands out as a strategy that is of high risk but it can bring in very big profit for any trader if properly used. The problem is that it can also make any trader lose all the money. Traders are allowed to see usable margins and margins that are used in the account information section of the platform offered by the online broker.

Usable margin can be defined as the difference noticed between Equity and the margin that is used. When the usable margin is equal to the equity the margin is used. Equity stands out as the most important factor that decides Margin Calls. To put it simple, when the equity is higher than the used margin, there will be no margin call. If the equity is equal or lower than the used margin the broker will start a margin call.

See this interesting forex video about Margin Calls in forex trading :

As a very simple example, margin calls will appear when traders have 10 open position lots and the equity falls under $5,000. If this happens then some of the open positions are going to be automatically closed at the prices that are current.

How to Avoid Margin Calls

You need to be very careful and avoid margin calls at all times by doing proper research and understanding what margin is. The trader needs to have very good money management skills and in the event that he/she does not have enough margin, every position should use stop loss. Also, whenever trading forex, never over trade as this can lead to margin calls.

We can conclude that you can gain an edge on most traders if you simply know more than they know. This means that you always have to undertake due diligence.