What is Margin Call? – InvestBro

in the world of trading Whether in Forex, Stocks or CFDs, Margin Calls are something to avoid. Because if you receive this notification from the brokerage company you are using. This indicates that the trading transaction you are currently executing is experiencing a huge loss.

Before understanding Margin Call, you must first know what it is. Margin in the trading world. Margin is the amount of money a trader needs to be able to open a trading position. This margin is taken from your total deposit and the profit from your trades (equity).

Margin can be divided into two parts: used margin or total used margin. and free margin or residual margin which can be used to open new positions and maintain current red trading positions.

What is Margin Call?

Margin call is a notification by the broker to the trader if the remaining margin is insufficient to maintain the status quo in red. This action is aimed at the trader to increase the deposit in his trading account.

Margin Call Example

Known:

A and B are the two traders who first traded forex at YYY Brokerage Company for the first trade. They sent 1000 USD as an initial deposit and opened a standard trading account.

ask:

Will A or B get a margin call if both lose 50 pips and A opens a 0.2 lot trade while B opens a 2 lot trade?

reply:

The answer is yes because Trader B no longer has the free margin required to maintain a trading position.

Margin call can occur if Margin Availability is less than Margin Requirements It is requested by the broker to hold the position. For example, to buy 10,000 units of USD, the broker asks the wholesaler 4% of the trade value as collateral. Therefore, the required margin that the trader must comply with is 4% x. 10,000 USD units = 400 USD

If the free margin owned by the trader is 200 USD, he will be called margin. So they have to increase their deposit balance. If the trader is unable to The broker will force close the trade position.

Cause of Margin Call

1. Bulk Trade

High volume trading can mean two things. That is to say, in a single trading table. Traders open multiple positions on different instruments. and trade in one tool But the trading volume is as big as Trader B in the above example.

Both can cause a collateral call. Opening positions on multiple instruments at the same time can use free margin. This is because every asset traded has a margin requirement.

Big trading volumes can also make huge profits. In addition to using the leverage facility Only if losses can be increased as with Trader B above, then a margin account trader for both Forex and Equity must choose the appropriate leverage ratio wisely. and manage their finances wisely.

2. Forget to place stop loss

The second reason is that the trader either forgot or didn’t set a stop loss. Therefore, when asset prices fall sharply The trading system will not sell immediately at any point. As a result, these losses erode the funds used as collateral (margin) until they are exhausted and the remaining margin erodes.

3. Small Deposit Fund

Nowadays, there are many brokerage firms that use minimum or no deposit. This offer certainly attracts novice traders who are still learning Forex or stock trading. But the disadvantage is This means that the deposits deposited by the trader will expire faster and the trader will get a Margin Call.

How to avoid margin calls

Here’s how to avoid Margin Call:

1. Deposit enough money

which means You must have a trading plan before opening a margin account. This is especially true at brokerage firms with no minimum deposit. This way, you will know how much you are guaranteed as margin.

2. Don’t forget to set Stop Loss.

both in investment and trading Stop Loss is one of the most important features to prevent losses from exceeding the limit. This stop loss limit can be set in several ways. One of them is to look at the history of the price that has touched an asset’s support level.

3. Learn how to manage risk and trade finance well.

How does managing this risk include knowing your risk profile? How to determine the order quantityHow to determine the appropriate leverage level, etc.

4. Choose a good brokerage firm.

There are many types of brokerage firms that make profits when traders lose. But there are also brokers that link traders’ trading data directly to liquidity providers so that profits come from spreads and commissions paid solely by the traders in each transaction.

Conclusion

A margin call is a notification sent by the broker to the trader informing that the remaining margin he has is not enough to maintain an existing trading position. Therefore, traders are asked to increase the content of the deposit funds. If the trader is unable to The relevant trade transactions will be forcibly closed by the broker.