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.
To owe additional funds to the broker is actually the worse case scenario. 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. 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.
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 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.
For example, you have $1500 in your trading account. You use a leverage of 100:1 to trade in standard lots of $100,000. 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.
You want to trade one standard lot of CHF/USD. That is CHF 100,000. Suppose the CHF/USD exchange rate is 1.3465. You need to convert it into Swiss Francs since your account is in US Dollars. So you need $1346 to trade standard lot of CHF 100,000. This is because with a leverage of 100:1, CHF 1000 are needed to control CHF 100,000.
Each pip is exactly equal to $10 in this case. Suppose you are very new and dont know about stop losses, you start trading without putting stop losses in place. Your trading account has $1500. The margin required to keep the trade open is $1346.
There are no stop losses in place. The chances are you are going to receive a margin call soon. When can you expect to receive a margin call? You will receive a margin call when your equity drops below $1346. You have $1500 equity in your trading account. Your open position will be automatically closed when you receive a margin call. 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. Assuming that there are no spreads involved. This is equal to just 15.4 pips loss. This example will make it clear the fast moving nature of the forex market and how using high leverage can suddenly result in getting a margin call.
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try 1500 Pips a day Forex Signals. Discover a revolutionary Forex Robot Trading System!
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