What is Margin Call? Forex Margin Call Explained

To be successful in Forex trading, you must understand the term called margin call. In this article, we’ll learn about margin calls in forex.

What is Margin Call in Forex?

Margin is the amount of money in your trading account you need to keep your positions open and cover any losses.

A margin call is an alert that notifies you when you need to deposit more balance in your trading account to keep a position open. If the funds in your account are below the margin requirement, you’ll be in the margin call.

You need to add more funds to your account or close positions to maintain your account’s margin requirement.

Let’s say a trader starts to lose money. So the funds in his account may not be enough to keep other trades open. In that case, your broker will notify you to add funds to bring your balance up to the minimum margin – this is a margin call. When you add balance, you can continue to trade.

The Danger Zone: Why Margin Calls Happen

We already know we need a certain amount of money in your trading account to keep the trades open. And if you start losing much of the money on trades you might not have enough money to cover those losses, right? And the more leverage you have used the bigger risk of running out of cash. And this is when the margin call hits. This is more like a warning that you need to add more money or else BOOM!

The Consequences of Ignoring a Margin Call

And if you are thinking you can ignore the margin call online, then it’s a bad idea. If you don’t add more money to your account, your broker may even force you to sell your stuff (read everything) though it’s at a loss price. And who on earth would want that to happen? It could mean losing your entire trading account and all the cash you’ve got in there. Horrifying, right?

5 ways to avoid margin call in Forex trading

You’ll almost certainly lose money if your account triggers a Margin Call. It is because your positions will be closed regardless of whether they are profitable or not. Receiving a Margin Call in the first place indicates that the majority of your trades are in the red.

To avoid margin call:

• Always follow an effective risk management strategy
• Do not risk more than 2%
• Do not overleverage
• Do not over-trade
• Trade smaller sizes

No doubt, that these margin calls can be a real pain. But these 5 tips will help you avoid getting hit with the margin calls. Let’s learn more:

Tip 1: Follow an Effective Risk Management Strategy

Risk management is all about protecting your hard-earned money. With solid risk management, you have a perfect game plan to carry the show on, and to be honest who doesn’t want to lock their hard-earned money? To enable this make sure you properly use stop-loss orders. What’s a stop-loss order? It makes sure to close your trades if they start losing so much money. Pretty much handy, right?

Tip 2: Don’t Risk More Than 2%

Looks pretty simple but it’s super important. On a single trade, you shouldn’t take a risk of more than 2% of your total account balance. And with this, if things get totally out of hand, you won’t get totally canceled. So let’s say, you have $1000 in your account and in this case, you shouldn’t risk more than $20 bucks on any trade. Easy peasy, right?

Tip 3: Don’t Over-Leverage

Hands down leverage is a powerful tool but it can be quite dangerous at times when you aren’t careful. Too much leverage will make your chances of loss skyrocketed and will increase the chances of the margin call. Use it wisely and use the perfect amount for your trading needs.

Tip 4: Don’t Over-Trade

Over trading seems so fine but it will let you drown in surefire. Stick to your trading plan, don’t let these greed-triggering trades ruin your forex journey. Patience is the key to success as you know.

Tip 5: Trade Smaller Sizes

Moving to our tip no 5 which elucidates smaller position sizes can be a lifesaver when it’s about avoiding margin calls. Just give a thought you are only risking a small amount on each trade, then will that be too easy to blow through your account balance? It will not be as exciting as having big bucks in your profit but will ensure you stay in the long run.

Conclusion:

Here you go, guys! These five pro tips will help you to clear those pesky margin calls. Follow the guidelines, stick to your trading plan and you are good to go.

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