Have you started dreading the forex margin call? The risk that is assumed when trading aggressively the currency markets often results in receiving a margin call. But contrary to the popular opinion that a margin call represents that worst case scenario for the currency trader, this is far from the truth. The worst case could be far worse.
A margin call is in fact a safeguard to protect a trader from losing 100% or even more of the money in the trading account. To owe additional funds to the broker is actually the worse case scenario. This uncomfortable position is largely avoided because of the existence of the margin call.
If you have been trading stocks you might have actually received a call or a text message from your stock broker that you need to add more funds to your trading account. So in stock trading, you will receive an actual call from your stock broker to add more funds to your margin account when equity is running low in your stock trading account. A margin call is not actually a physical call from your broker in forex trading unlike the world of stock trading.
This is what happens in forex trading when you get a margin call. There is no physical call telling you to add funds to your account. The trading platform software automatically closes out all the open positions and immediately realizes all losses at the prevailing market rates when a forex trader no longer has enough equity in the trading account to keep the open positions viable in forex trading. You might be thinking a cold hearted behavior of your forex broker.
Prices can move extremely fast in forex markets and because of the high leverage used, every price move is magnified. There are good reasons for automated margin calls in forex trading, although this may seem a bit cold hearted.
The trading account can become depleted very quickly with not enough time to call for more funds when the traders equity runs low in forex trading. The forex margin call closes all open positions to help ensure that the trader does not lose the entire account or worse as a safeguard measure.
For example, you have $1500 in your trading account. You use a leverage of 100:1 to trade in standard lots of $100,000. So exactly when is a margin call triggered? This depends exactly on the number and the size of the lots being traded, the leverage chosen and the equity in the account.
You want to trade one lot of EUR/USD. Since your account is in US Dollars, you need to convert it into Euros. Suppose the EUR/USD exchange rate is 1.3465. So you need $1346 to trade standard lot Euros 100,000 of EUR/USD. This is because Euros 1000 are needed to control Euros 100,000.
Each pip is exactly equal to $10 in this case. Suppose you are very new and dont know about stop losses, you start trading without putting stop losses in place. Your trading account has $1500. The margin required to keep the trade open is $1346.
You will receive a margin call when your equity drops below $1346 and your open position will be automatically closed at this point. That means once you lose the excess equity in your account above the margin required to trade a standard lot that is $1500-$1346= $154. This is equal to 15.4 pips loss (assuming no spread). - 29866
A margin call is in fact a safeguard to protect a trader from losing 100% or even more of the money in the trading account. To owe additional funds to the broker is actually the worse case scenario. This uncomfortable position is largely avoided because of the existence of the margin call.
If you have been trading stocks you might have actually received a call or a text message from your stock broker that you need to add more funds to your trading account. So in stock trading, you will receive an actual call from your stock broker to add more funds to your margin account when equity is running low in your stock trading account. A margin call is not actually a physical call from your broker in forex trading unlike the world of stock trading.
This is what happens in forex trading when you get a margin call. There is no physical call telling you to add funds to your account. The trading platform software automatically closes out all the open positions and immediately realizes all losses at the prevailing market rates when a forex trader no longer has enough equity in the trading account to keep the open positions viable in forex trading. You might be thinking a cold hearted behavior of your forex broker.
Prices can move extremely fast in forex markets and because of the high leverage used, every price move is magnified. There are good reasons for automated margin calls in forex trading, although this may seem a bit cold hearted.
The trading account can become depleted very quickly with not enough time to call for more funds when the traders equity runs low in forex trading. The forex margin call closes all open positions to help ensure that the trader does not lose the entire account or worse as a safeguard measure.
For example, you have $1500 in your trading account. You use a leverage of 100:1 to trade in standard lots of $100,000. So exactly when is a margin call triggered? This depends exactly on the number and the size of the lots being traded, the leverage chosen and the equity in the account.
You want to trade one lot of EUR/USD. Since your account is in US Dollars, you need to convert it into Euros. Suppose the EUR/USD exchange rate is 1.3465. So you need $1346 to trade standard lot Euros 100,000 of EUR/USD. This is because Euros 1000 are needed to control Euros 100,000.
Each pip is exactly equal to $10 in this case. Suppose you are very new and dont know about stop losses, you start trading without putting stop losses in place. Your trading account has $1500. The margin required to keep the trade open is $1346.
You will receive a margin call when your equity drops below $1346 and your open position will be automatically closed at this point. That means once you lose the excess equity in your account above the margin required to trade a standard lot that is $1500-$1346= $154. This is equal to 15.4 pips loss (assuming no spread). - 29866
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try 1500 Pips a day Forex Signals. Discover a revolutionary Forex Robot Trading System!
