A margin call is the most confusing of all the terms related to Forex that people find hard to understand. However, no one should skip learning it for his own sake as this word is the Forex industry equivalent of saying someone has gone bankrupt. In this article, we will discuss this concept in detail so that no one is still confused about it.
Margin Call in Forex Trading
Let’s assume that someone has opened an account to trade Forex and in the account, he has a $10,000 deposit. Now, after logging in for the first time into that account, he will see that he has $10K in the Equity column in the account Information window.
After inspecting things further, he will also see that his used margin amount is “null” and the usable amount indicator is showing the whole amount of $10K.
The Usable Margin will always show the amount that equals the used portion subtracted from the Equity.
The equation is –
Usable = Total Equity – Used
Therefore, traders should understand that it is Equity that determines the amount of Usable volume. Not the balance. Your Equity will also set the margin call’s boundary.
You will never have a margin call till your Equity is greater than your used amount. But the moment the Equity amount reaches or plummets below the “Used Portion”, the owner of the account will receive a call.
Now, let’s further assume that the person’s margin requirement is 1%. He buys 1 EUR/USD lot. His Equity will remain $10K. Used will become $100 as the amount required in the mini account is 1% which is $100. Now the Usable margin becomes $9,900.
If the person closes the trade at the breakeven point, his “Used level” would become $0.00 again, and his Usable potion would come back up to $10K.
But if instead of closing the previous lot, the person got confident and bought more assets, his margin level would decrease. To know more about margin call, make sure you check the broker’s website. In the CFD trading business, margin call tends to vary as it is subject to the broker’s pricing.
The margin call is a critical factor for full-time traders. If the floating loss exceeds a certain threshold level, the broker might close the trade forcibly. This is known as a margin call. Different brokers tend to have different kinds of margin levels for traders. So, you need to check the margin requirements before taking any trades in any particular asset.
Smart traders never face any issues related to margin calls since they know the proper way to manage their risk exposure. They never trade with high risk since they know it can blow up their trading account. To be on the safe side, a trader needs to focus on long-term goals and trade the market with very low risk. Never increase the risk factors as it will make things worse.
Use of leverage
The majority of novice traders don’t have the skills to determine the optimum leverage for their trading account. They trade with insane leverage and expect to make a big profit. By following this approach they become restless. Eventually, they start to make silly mistakes and quit trading. On the other hand, professional traders always trade with low leverage trading accounts since they know it will keep their trading accounts safe. Leverage should be managed in a very careful way. Just because the broker is offering insane leverage doesn’t mean you have to trade with high leverage. Trade with low leverage so that you can manage your risk profile in a very professional way. Never trade the market with an aggressive attitude. Follow a simple risk management plan and look for reliable trade signals without using a complex trading strategy. Last but not least, keep learning new things about the CFD trading industry.