Margin call explained and Causes of margin call you should avoid.  

A margin call, a trader’s nightmare, is call received when the margin used to hold position is equal to your account balance or used up.

You no longer have enough money on your account to hold positions and the broker is at the verge of closing out your positions. A call received from a broker instructing you to deposit more money on your account to maintain the required margin to continue trading or he closes off your open account.

Usable margin and %ge usable margins.

Usable margin = free margin

The amount available that can be used to open up new positions.

Usable margin = Equity – used margin

When your equity falls below the used margin or is equal to the used margin, you will receive a margin call from your broker.

For example, if your required margin is $1000, and you have an account of $10000, if the held position goes against you to a loss of $9000 resulting to your equity equal to $1000 equal to your required margin, you will be restricted from taking another position unless the trade turns around back to your favor redeeming your chances.

If it continues to go against you, you will receive a call from your broker requesting you to either add more capital to your account or the open trades will automatically close down one by one starting with the biggest losing trade until you are closed out of the market.

The process of closing out losing positions due to lack of enough capital on your account to run open trades is known as stop-out.

Stop-out level

When your equity falls below the margin level and reaches as low as 5%, the system starts closing your losing open trades automatically starting with the biggest losing position.

Every time a losing trade is closed, you will realize that the equity value will increase. This is because the amount that was held as margin for the closed trade is being released.

When the trades continue going against you, more trades will be closed as long as your equity  and your margin level reaches 5%  or else you will have to deposit more money if you want to keep your trades running.

Causes of margin call you should avoid.

  • Holding on to a losing trade for long/greed depletes usable margin
  • Over leveraging your account
  • Using small capital accounts which forces you to overtrade with too little usable margin.

If you are holding an account of $10,000 to trading USD/CHF going long at 0.1 lot size risking only 2% on your account. If you have a stop loss of 100 pips and it happens to be a failed trade.

Used margin = $200.

Each pip moved is equal to $1, the appropriate size for a mini size would be 2. This means when the trade closes at the trigger of the stop loss you will only lose $200.

Let’s try to compare this scenario when leverage is used. If you are required to contribute 1% margin to trade $50,000 position having an account of $10,000. Leverage ratio 50:1 each pip moved is equal to $50.

For 100 pips stop loss, the loss would be (100×50) =$5000 which is half your account. Too much leverage can cause unnecessary draw downs and can wipe off your account just in a single trade.

That is why over leveraging leads to quick margin calls.

 

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