Margin Call

What is a Margin Call?

In the event that money in your account falls below margin requirements (usable margin), your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.

Example#1
Let’s say you open a regular Forex account with $2,000. You open 1 lot of the EUR/USD, with a margin requirement of $1000. Usable Margin is the money available to open new positions or sustain trading losses. Since you started with $2,000, your usable margin is $2,000. But when you opened 1 lot, which requires a margin requirement of $1,000, your usable margin is now $1,000.

If your losses exceed your usable margin of $1,000 you will get a margin call.

Example#2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the EUR/USD, with a margin requirement is $1000. Remember, usable margin is the money you have available to open new positions or sustain trading losses. So prior to opening 1 lot, you have a usable margin of $10,000. After you open the trade, you now have $9,000 usable margin and $1,000 of used margin.

If your losses exceed your usable margin of $9,000, you will get a margin call. Make sure you know the difference between usable margin and used margin.

If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or your broker will close your position to limit your risk and his risk. As a result, you can never lose more than you deposit.

If you are going to trade on a margin account, it’s vital that you know what your broker’s policies are on margin accounts.

You should also know that most brokers require a higher margin during the weekends. This may take the form of 1% margin during the week and if you intend to hold the position over the weekend it may rise to 2% or higher.

The topic of margin is a touchy subject and some argue that too much margin is dangerous. It all depends on the individual. The important thing to remember is that you thoroughly understand your broker’s policies regarding margin and that you understand and are comfortable with the risks involved.

Some brokers describe their leveraging in terms of a leverage ratio and other in terms of a margin percentage. The simple relationship between the two terms is:

Leverage = 100 / Margin Percent

Margin Percent = 100 / Leverage

Leverage is conventionally displayed as a ratio, such 100:1 or 200:1.