Forex margin call

Margin in Forex trading. Margin level vs Margin call.

Margin is one of the most important concepts of Forex trading. However, a lot of people don't understand its significance or simply misunderstand the term. Fortunately, we can help you out. What is known as a Forex margin is basically a good faith deposit that is needed to maintain open positions. A margin is not a fee or a transaction cost, but instead a portion of your account equity set aside and assigned as a margin deposit. We should warn you that trading on a margin can have different consequences. It can influence your trading experience both positively and negatively, with both profits and losses potentially being seriously augmented.

Your broker takes your margin deposit and then pools it with someone else's margin Forex deposits. Brokers do this in order to be able to place trades within the whole interbank network. A margin is often expressed as a percentage of the full amount of the chosen position. For instance, most Forex margin requirements are estimated to be: 2%, 1%, 0.5%, 0.25%. Based on the margin required by your FX broker, you can calculate the maximum leverage you can wield with the trading account you have.

What is Forex margin level?

In order to understand Forex trading better, one should know all they can about margins. We want you to get acquainted with the term Forex margin level, which you need to understand. The Forex margin level is the percentage value based on the amount of accessible usable margin versus used margin. In other words, it is the ratio of equity to margin, and is calculated in the following way: margin level = (equity/used margin) x 100. Brokers use margin levels in an attempt to detect whether FX traders can take any new positions or not.

Different brokers have different limits for the margin level, but most will set this limit as 100%. This limit is called margin call level. Technically, a 100% margin call level means that when your account margin level reaches 100%, you can still close your positions, but you cannot just take any new positions. As expected, 100% margin call levels occur when your account equity is equal to the margin. This usually happens when you have losing positions and the market is quickly and constantly going against you. When your account equity equals the margin, you will not be capable of taking any new positions.

What is margin level in Forex? We'll use an example to answer this question. Imagine that you have a $10,000 account and you have a losing position with a margin evaluated at $1,000. If your position goes against you and it goes to a $9,000 loss then the equity will be $1,000 (i. e $10,000 - $9,000), which equals the margin. Thus, the margin level will be 100%. Again, if the margin level reaches the rate of 100%, you can't take any new positions, unless the market suddenly turns around and your equity turns out to be greater than the margin.

Let us presume that the market keeps on going against you. In this case, the broker will simply have no choice but to shut down all your losing positions. This limit bears a special name and that is the stop out level. For example, when the stop out level is established at 5% by a broker, the platform will start closing your losing positions automatically if your margin level reaches 5%. It is important to note that it starts closing from the biggest losing position.

Often, closing one losing position will take the margin level Forex higher than 5% as it will release the margin of that position, so the total used margin will go lower and consequently the margin level will go higher. The system often takes the margin level higher than 5% by closing the biggest position first. If your other losing positions continue losing and the margin level reaches 5% once more, the system will just close another losing position.

You might ask why brokers even do this. Well, the reason why brokers close positions when the margin level reaches the stop out level is because they cannot permit traders to lose more money than they have deposited into their trading account. The market could potentially keep going against you forever and the broker cannot afford to pay for this sustained loss.

What is free margin in Forex?

Free margin Forex is the amount of money that is not involved in any trade and you can use it to take more positions. That isn't all - the free margin is the difference of the equity and margin. If your open positions make you money, the more they go to profit then the greater equity you will have, so you will have more free margin.

There is one topic that ought to be discussed. There may be a situation when you have some open positions and also some pending orders simultaneously. The market wants to trigger one of your pending orders but you don't have enough Forex free margin in your account. That pending order will either not be triggered or will be cancelled automatically. This can cause some traders to think that their broker failed to carry out orders and that they are a bad broker. Of course in this instance, this just isn't true. It's simply because the trader didn't have enough free margin in their trading account.

We hope that we have answered the question - what is free margin in Forex?

What is margin call in Forex?

A margin call is perhaps one of the biggest nightmares Forex traders can have. This happens when your broker informs you that your margin deposits have simply fallen below the required minimum level owing to the fact the open position has moved against you. Trading on margin can be a profitable Forex strategy, but it is important to understand all the possible risks. You should make sure you know how your margin account operates, and be sure to read the margin agreement between you and your selected broker. If there is anything you are unclear about in your agreement, ask questions.

There is one unpleasant fact for you to take into consideration about the margin call Forex. You might not even receive the margin call before your positions are liquidated. If the money in your account falls under the margin requirements, your broker will close some or all positions, as we have specified above several times. This can actually help prevent your account from falling into a negative balance.

How can you avoid this unanticipated surprise? Margin calls can be effectively avoided by carefully monitoring your account balance on a regular basis and by using stop-loss orders on every position to minimise the risk.

Margins are a debatable topic. Some traders argue that too much margin is very dangerous, however it all depends on the personality and the amount of trading experience one has. If you are going to trade on a margin account, it is important that you know what your broker's policies are on margin accounts and that you understand and are comfortable enough with the risks involved. Be careful to avoid a Forex margin call.

As we are approaching the end of our guide, it is important to draw your attention to one fact. Most brokers require a higher margin during the weekends. In fact, this might take the form of a 1% margin during the week and if you want to hold the position over the weekend, it may rise to 2% or higher.

Conclusion.

As you understand, FX margins are one of the aspects of Forex trading that must not be overlooked as it could lead to an unpleasant outcome. In order to avoid it, you should understand the theory about margins, margin levels and margin calls, and apply your trading experience to create a viable Forex strategy. Indeed a well developed approach will undoubtedly give you profit in the end.

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Risk warning: Trading Forex (foreign exchange) or CFDs (contracts for difference) on margin carries a high level of risk and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investment. Therefore, you should not invest or risk money that you cannot afford to lose. Before using Admiral Markets UK Ltd or Admiral Markets AS’ services, please acknowledge all of the risks associated with trading.

The content of this website must not be construed as personal advice. We recommend that you seek advice from an independent financial advisor.

All references on this site to ‘Admiral Markets’ refer jointly to Admiral Markets UK Ltd and Admiral Markets AS. Admiral Markets’ investment firms are fully owned by Admiral Markets Group AS.

Admiral Markets UK Ltd is registered in England and Wales under Companies House – registration number 08171762. Admiral Markets UK Ltd is authorised and regulated by the Financial Conduct Authority (FCA) – registration number 595450. The registered office for Admiral Markets UK Ltd is: 16 St. Clare Street, London, EC3N 1LQ, United Kingdom.

Admiral Markets AS is registered in Estonia – commercial registry number 10932555. Admiral Markets AS is authorised and regulated by the Estonian Financial Supervision Authority (EFSA) – activity license number 4.1-1/46. The registered office for Admiral Markets AS is: Ahtri 6A, 10151 Tallinn, Estonia.

How does margin trading in the forex market work?

When an investor uses a margin account, he or she is essentially borrowing to increase the possible return on investment. Most often, investors use margin accounts when they want to invest in equities by using the leverage of borrowed money to control a larger position than the amount they'd otherwise by able to control with their own invested capital. These margin accounts are operated by the investor's broker and are settled daily in cash. But margin accounts are not limited to equities - they are also used by currency traders in the forex market.

Investors interested in trading in the forex markets must first sign up with either a regular broker or an online forex discount broker. Once an investor finds a proper broker, a margin account must be set up. A forex margin account is very similar to an equities margin account - the investor is taking a short-term loan from the broker. The loan is equal to the amount of leverage the investor is taking on.

Before the investor can place a trade, he or she must first deposit money into the margin account. The amount that needs to be deposited depends on the margin percentage that is agreed upon between the investor and the broker. For accounts that will be trading in 100,000 currency units or more, the margin percentage is usually either 1% or 2%. So, for an investor who wants to trade $100,000, a 1% margin would mean that $1,000 needs to be deposited into the account. The remaining 99% is provided by the broker. No interest is paid directly on this borrowed amount, but if the investor does not close his or her position before the delivery date, it will have to be rolled over, and interest may be charged depending on the investor's position (long or short) and the short-term interest rates of the underlying currencies.

In a margin account, the broker uses the $1,000 as security. If the investor's position worsens and his or her losses approach $1,000, the broker may initiate a margin call. When this occurs, the broker will usually instruct the investor to either deposit more money into the account or to close out the position to limit the risk to both parties.

What is a Margin Call?

Forex trades are almost entirely margined -- in effect; the broker gives you the opportunity to make trades with money you don't have. The average leverage on the forex is very high -- between 50:1 and 200:1. Leveraging an account to the maximum 200:1 ratio means that even the slightest drop in the value of your ​active trades can wipe you out. That's when you get a margin call from the broker. If you want to continue trading, you'll have to put more money in your forex account.

So the simplest answer to the question "What is a margin call" is that it's a demand from your broker to put more money in your account if you want to continue to trade. The more complicated question is: how and why does this happen?​​

A Moment of Reflection.

Before considering that question, reflect for a moment on real estate. Most Americans are familiar with the real estate market, where the majority of residential purchases require the buyer to put up a minimum of 20 percent of the value of the house before the mortgage company supplies the remaining 80 percent. That's effectively five to one leveraging. If the mortgage industry operated like the forex, with 200:1 leveraging, you could buy a $500,000 house with a down payment not of $100,000, but of only $2,500.

Consider also that the mortgage industry also has extensive qualifications you need to meet to take out the loan in the first place, beginning with proof of income.

Your mortgage payments can only total around 30 to 40 percent of annual household earnings. You also have to have a relatively extensive record of paying your bills on time.

Contrast that with the forex where the only thing you need to open your account is an ID and a credit or debit card. That's right -- you don't need to put up any money at all.

Effectively, you're trading with borrowed money from the start. And you don't have to demonstrate that you can pay back the money if you lose. It can just go on your credit card as high-interest debt you'll pay back over months or even years.

One last difference between the real estate market and the forex is that the ups and down in the real estate industry are over relatively long periods of time. In a single day or even a single month, the change in the value of your house probably won't vary more than a few tenths of a percent. "Highly volatile" in the real estate industry might be something like a 10 percent value shift over a year. Normal volatility in the currency markets can wipe out highly leveraged traders in a matter of minutes, even seconds.

What Does This Suggest?

If you think that the way the forex operates is a recipe for disaster you're right -- not for brokers, but for the trader who's quickly in over his head. The average forex investor loses -- more than two-thirds lose money, in fact. And it only takes on average about four months for the average trader to be so discouraged or broke or both that the account closes and he's out of the market entirely. With that in mind, consider the likelihood of the average forex trader getting a margin call.

What Causes Margin Calls.

In a 2014 article in DailyFX, a well-known online forex market newsletter, trading instructor Tyler Yell identifies the trading behaviors that produce margin calls in a nutshell: " the use of excessive leverage with inadequate capital while holding on to losing trades for too long when they should have been cut."

Avoiding Margin Calls.

Two simple ways to prevent a margin call are keeping your account well-capitalized and learning to cut your losses short to let your profits run. These two simple components should be part of any Forex Trading Strategy. Well-capitalized accounts are not just a 'nice thing to have,' but rather a necessity in nearly all financial markets. The ability to close out a trade that is no longer working in the manner you hoped helps to ensure you are still around for the next opportunity the market presents.

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Margin Call Explained.

Assume you are a successful retired British spy who now spends his time trading currencies. You open a mini account and deposit $10,000.

When you first login, you will see the $10,000 in the “Equity” column of your “Account Information” window.

Usable Margin.

You will also see that the “Used Margin is “$0.00”, and that the “Usable Margin” is $10,000, as pictured below:

Your Usable Margin will always be equal to “Equity” less “Used Margin.”

Usable Margin = Equity – Used Margin.

Therefore it is the Equity, NOT the Balance that is used to determine Usable Margin. Your Equity will also determine if and when a Margin Call is reached.

As long as your Equity is greater than your Used Margin, you will not have Margin Call.

( Equity > Used Margin ) = NO MARGIN CALL.

As soon as your Equity equals or falls below your Used Margin, you will receive a margin call.

( Equity =< Used Margin ) = MARGIN CALL, go back to demo trading!

Let’s assume your margin requirement is 1%. You buy 1 lot of EUR/USD.

Your Equity remains $10,000. Used Margin is now $100, because the margin required in a mini account is $100 per lot. Usable Margin is now $9,900.

If you were to close out that 1 lot of EUR/USD (by selling it back) at the same price at which you bought it, your Used Margin would go back to $0.00 and your Usable Margin would go back to $10,000. Your Equity would remain unchanged at 10,000.

You will still have the same Equity, but your Used Margin will be $8,000 (80 lots at $100 margin per lot). And your Usable Margin will now only be $2,000, as shown below:

With this insanely risky position on, you will make a ridiculously large profit if EUR/USD rises. But this example does not end with such a fairy tale.

Let us paint a horrific picture of a Margin Call which occurs when EUR/USD falls.

EUR/USD starts to fall. You are long 80 lots, so you will see your Equity fall along with it.

Your Used Margin will remain at $8,000.

Once your equity drops below $8,000, you will have a Margin Call.

This means that some or all of your 80 lot position will immediately be closed at the current market price.

Assuming you bought all 80 lots at the same price, a Margin Call will trigger if your trade moves 25 pips against you.

Humbug! EUR/USD can move that much in its sleep!

How did we come up with 25 pips? Well each pip in a mini lot is worth $1 and you have a position open consisting of 80 freakin’ mini lots. So…

$1/pip X 80 lots = $80/pip.

If EUR/USD goes up 1 pip, your equity increases by $80.

If EUR/USD goes down 1 pip, your equity decreases by $80.

$2,000 Usable Margin divided by $80/pip = 25 pips.

Let’s say you bought 80 lots of EUR/USD at $1.2000. This is how your account will look if it EUR/USD drops to $1.1975 or -25 pips.

As you can see, your Usable Margin is now at $0.00 and you will receive a MARGIN CALL!

Of course, you’re a veteran international spy and you’ve faced much bigger calamities.

You’ve got ice in your veins and your heart rate is still 55 bpm.

After the margin call this is how your account will look:

EUR/USD moves 25 PIPS, or less than .22% ((1.2000 – 1.1975) / 1.2000) X 100% and you LOSE $2,000!

You blew 20% of your trading account! (($2,000 loss / $10,000 balance)) X 100%

In reality, it’s normal for EUR/USD to move 25 pips in a couple seconds during a major economic data release, and definitely that much within a trading day.

Oh we almost forget…we didn’t even factor in the SPREAD!

To simplify the example, we didn’t even factor in the spread, but we will now to make this example super realistic.

Let’s say the spread for EUR/USD is 3 pips. This means that EUR/USD really only has to move 22 pips, NOT 25 pips before a margin call.

Imagine losing $2,000 in 5 seconds?!

The sad fact is that most new traders don’t even open a mini account with $10,000.

Because you had at least $10,000, you were at least able to weather 25 pips before his margin call.

If you only started off with $9,000, you would have only been able to weather a 10 pip drop (including spread) before receiving a margin call. 10 pips!

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