Many new forex traders all of sudden receive a margin call. Maybe they did not educate themselves properly about forex trading and started trading. Have you ever received the dreaded forex margin call? Whatever, you must be very clear about what is a forex margin call. But contrary to the popular opinion that a margin call represents that worst case scenario for the currency trader, this is far from the truth. The risk that is assumed when trading aggressively the currency markets often results in receiving a margin call. The worst case could be far worse.
A margin call is in fact a safeguard to protect a trader from losing 100% or even more of the money in the trading account. To owe additional funds to the broker is actually the worse case scenario. This uncomfortable position is largely avoided because of the existence of the margin call.
If you have been trading stocks you might have actually received a call or a text message from your stock broker that you need to add more funds to your trading account. So in stock trading, you will receive an actual call from your stock broker to add more funds to your margin account when equity is running low in your stock trading account. A margin call is not actually a physical call from your broker in forex trading unlike the world of stock trading.
This is what happens in forex trading when you get a margin call. There is no physical call telling you to add funds to your account. The trading platform software automatically closes out all the open positions and immediately realizes all losses at the prevailing market rates when a forex trader no longer has enough equity in the trading account to keep the open positions viable in forex trading. You might be thinking a cold hearted behavior of your forex broker.
Although this may seem a bit cold hearted, there are good reasons for automated margin calls in forex trading. Prices can move extremely fast in forex markets and because of the high leverage used, every price move is magnified.
The trading account can become depleted very quickly with not enough time to call for more funds when the traders equity runs low in forex trading. The forex margin call closes all open positions to help ensure that the trader does not lose the entire account or worse as a safeguard measure.
Lets make it clear with an example. Suppose you have $1500 in your trading account. So exactly when is a margin call triggered? This depends exactly on the number and the size of the lots being traded, the leverage chosen and the equity in the account. Suppose you use a leverage of 100:1 to trade in standard lots of $100,000.
You want to trade one lot of EUR/USD. Since your account is in US Dollars, you need to convert it into Euros. Suppose the EUR/USD exchange rate is 1.3465. So you need $1346 to trade standard lot Euros 100,000 of EUR/USD. This is because Euros 1000 are needed to control Euros 100,000.
Suppose you are a new forex trader. You don't know much about forex trading. However you have read that it is a great opportunity to make money. Naturally you are very enthusiastic about trading forex as quickly as possible. So you don't know that stop losses are used to minimize downside risk in trading. You start trading without putting stop losses in place. Your trading account has $1500. The margin required to keep the trade open is $1346. Each pip is exactly equal to $10 in this case.
You will receive a margin call when your equity drops below $1346 and your open position will be automatically closed at this point. That means once you lose the excess equity in your account above the margin required to trade a standard lot that is $1500-$1346= $154. This is equal to 15.4 pips loss (assuming no spread).