A Margin Call is a possible event in which a trader possesses losing positions that put him on the verge of entering a negative balance in his Forex account. In order to prevent such a turn of events, a margin call occurs. This is where all of the trader’s open positions are being automatically closed, thus preventing him from entering into debt.
Let’s try to understand it a little bit better. When a trader uses brokerage services to enter the foreign exchange (Forex) market, he gets the opportunity to leverage his funds using a loan he receives from his forex company, called margin. By utilizing margin, traders are increasing their purchasing power so that they can own more lots without fully paying for it.
In ForexYard, for example, a trader can leverage his funds up to 1:200, meaning that a trader who opened an account with the sum of $10,000 can open new positions up to the amount of $2,000,000!
However, using such high leverage will expose you to harsh risks, and may rapidly end your investing experience. Always remember that having the opportunity to gain 200 times larger profits will likewise endanger you with the risk of losing just as much.
ForexYard recognizes that its traders are using leverage and that the foreign exchange market tends to greatly fluctuate. Therefore, there is a very important safety feature embedded in the system that prevents clients from losing more money than they have in their accounts. Should the account equity, meaning the total floating value of the account, fall below the margin requirement of approximately 20% of the used margin, the dealing desk will close all positions. This protects the trader from losing more than the funds he deposited into the trading account.
In short, Margin Calls pop up when a trader’s equity reaches dangerous lows in order to protect them from entering a negative balance, or debt, with their broker. The margin call allows traders to trade peacefully without being concerned about getting into debt.
To calculate what it means when I say “20% of the used margin” let us do a sample trade:
If you open 5 lots of EUR/USD, Buy; the margin required to open this position is $250 ($50 per lot – this amount is identical across all currency pairs).
Once your Equity (which is your balance plus/minus your profits/losses) reaches 20% of the $250 used to open the position, the position will be closed.
Mathematically: 20% of $250 = $50. once your Equity falls to $50, your positions will be automatically closed. This is a Margin Call.
