In the previous lesson, we talk about what is leverage in forex trading, we also talked a little about MARGIN and today we will briefly talk about forex trader’s night mare called MARGIN CALL.
As I have said in the last lesson, when you trade, a certain percentage of your deposits stays with your broker as a “GOOD FAITH DEPOSIT” or simply MARGIN and the rest will serve as a FREE MARGIN – which the trader can use to place additional traders .
This free margin is like the breathable space in your trading account where trades can run freely. Normally when this margin call is happens traders refers to it as a BLOWN ACCOUNT.
To make you understand what is margin call, I will give a very lucid example using a forex trader we will just call this forex trader, TRADER A.
Trader A has $200 in his trading account and placed some trades without Stop-loss with a standard lot size. Few hours later the trades where all moving in his direction, and he decided to double his trades by placing multiply trades on that same pairs .
Its now bed time for Trader A, he feels so comfortable that when he wakes up his account will be tripled. So he didn’t even bother to place his Stop loss and then a high impact news was release later that night. So strong that it moved some pairs almost a hundred pips and his trades went against him, since he didn’t have a stop loss placed, nothing could limit his losses from exceeded, accompanied with his lack of money management (numerous positions on the same pair and a huge lot size) his usable margin couldn’t carry such move and his broker has to forcefully close his open positions because sad enough there isn’t money in his account again.
Trade A wakes up in the middle of the night to take a peek on his running trade only to get the MARGIN CALL notification.
What just happen, he has lost his $200 deposit
What Is Margin Call?
In definition terms, margin call is when the money in your trading account falls below margin requirements (usable margin). Your broker will forcefully close some or all open positions. This is to prevents your trading account from falling into a negative balance, even in a highly volatile or fast moving market.
This word “MARGIN CALL” is a night mare to forex trades especially newbies because it means your account is gone including your deposits.
In summary, I just want to make sure you know the difference between usable(free) margin and used margin.
If the EQUITY (your trading balance along with the unrealized loss or profit ) or Margin level (in percentage %) falls below zero 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 that means if you deposit $200 you can never lose more than that so you wont be indebted to your broker and your broker won’t have to suffer losses from his own side.
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 and period of high velocity . This may take the form of 1% margin during the week and if you intend to hold the position over the weekend or during news hours it may rise to 2% or higher.
In as much that MARGIN CALL can happen to any body but when a trader apply the right MONEY MANAGEMENT in terms of the right lot size, leverage and how many trades to open as once. Then you have notice to fear, many people have blown more than one trading account because they keep applying the same logic while excepting a different result.
Have you blown an account? Are you scare to start to trade forex because you don’t want to lose your money please do comment below I will love to hear from you.