A Forex Margin Call – What is it and Can a Margin Call Hurt Me?
A Forex Margin call happens when a client’s account equity falls below the required margin.
Leverage financed with credit, which is a description of what a margin account entails. This is very common in Forex. A margined account is a leverageable account in which Forex currencies can be purchased for a combination of cash or collateral. Various brokers accept different limits.
Investing on margin isn’t the same as gambling. There are some similarities between margin trading and the casino. Margin is a high-risk strategy that can yield a huge profit if handled correctly. The dark side of margin is that you can lose your shirt and many other assets you own. Investing in the margin without understanding what you’re doing is very risky.
As with any other investment research is the key to not losing your shirt! If, for instance, a client has 10 lots of open positions a margin call will occur if account equity drops below $5,000. At this point, some or all of the client’s open positions will be closed immediately at current prices.
Traders are also able to monitor both usable margin and used margin from the “Account Information” window of his/her online trading platform. Positions will be automatically closed once the usable margin drops below zero.
Traders may avoid margin calls by either using stop-loss orders or maintaining adequate funds in the account.
Normally the broker will have a minimum account size also known as account margin or initial margin e.g. $5,000-$10,000. Once you have deposited your money you will then be able to trade.
The title of this article asks, can a margin call hurt me? The answer is yes and very badly. But as in any other business, there are things you can do to minimize your risk.
If for any reason the broker thinks that your position is in danger, that is, you have a position of $50,000 with a margin of one percent ($500.00) and your losses are approaching your margin ($500.00). He will call you and either ask you to deposit more money or close your position to limit your risk and his risk.
Automatic stop loss is utilized as the safety net where the position is forced to cut automatically when the losses are at a certain point. It happens when the balance of the margin account, that is, the asset value with deducting the losses, becomes to fall short of the margin limits set by your Forex broker. This practice is a common practice in the Forex market.
There is a difference between weekday trading and over-the-weekend trading. Reduced leverage is available to leverage for over-the-weekend. The purpose of this policy is to protect clients from the risks caused by possible price swings during market closure. This could have a very serious effect on your invested funds.
How Do I Avoid A Margin call?
There are some common-sense ways to avoid a margin call
1. Good money management, manage how you trade
2. Use stop loss for every position if you don’t have an adequate margin
3. Do not overtrade
Hopefully, this article will make you aware of some of the possible pitfalls of a margin call.
Do your due diligence and you will be in a better position than many other investors.
There are many automated Forex Systems available. Look around and compare features.
