What is a Margin Call in Forex Trading?
A margin call in Forex is an event that occurs when a trade moves against you and your account equity drops below a certain level set by your broker. When a margin call occurs, the trader must add more equity to the account.
For example, if you have $2,000 in your account and you trade EUR/USD, and you receive a margin call, you will need to add more funds to keep that position open. In other words, a margin call is a minimum threshold or the amount of money you need to maintain in your trading account to keep your positions open.
Remember, when you receive a margin call and do not deposit the additional funds advised by your broker, your broker will liquidate your open positions. These calls can be sent via text or email. When the trader receives the margin call, they have a limited time to remedy the situation. They can either close the open positions or add more funds to meet the margin requirement.
Traders must understand what a margin call is and how it works. It is the total equity in their accounts minus the amount they borrowed (leveraged). If the equity is too low, a margin call will occur. The Forex broker and individual firms set the amount of cash required for margin calls.
It can be a percentage of the account or a specific amount of the trade price.
Let’s understand the margin call with an example. Suppose you deposited $10,000 in your trading account. So at this stage, your account equity is 10,000, and your useable margin is also $10,000 because you have not yet placed a trade. You can calculate the usable margin by subtracting the equity from the used margin.
Now let’s suppose you placed a trade using a margin of $1,000. Your usable margin will be $9000, which is your equity minus the used margin (10,000 – 1,000 = 9,000). If you continue placing the trades, your used margin will also continue to increase. But you will not receive a margin call as long as your equity remains great than your used margin. In our example, your used margin is just $1,000.
However, as soon as will place more trades and use all your available margin, you will receive a margin call from your broker. Simply put, you receive a margin call when your used margin exceeds your equity. If you don’t deposit more funds and meet the margin call requirement at that stage, your open positions will liquidate.