One of the terms associated with trading in the forex market that is thrown around a lot is called a margin call. There are other terms related to margin, such as margin level, margin requirements, and the margin call itself. Regardless of the specific term, margin is a crucially important concept in forex trading.
Margin is related to leverage or leveraged trading, which is itself a form of trading in which the broker lends you money for trading. In this way you can multiply your initial trading equity. But it all depends on a crucial point, you guessed it, the margin.
So in this article we want to take a closer look at margin, margin calls, and the idea that began it all, leveraged trading.
You should read: Forex Robot Development and Trends in 2024
The Root of a Margin Call: Leverage Trading
As we discussed very briefly in the intro, the idea of margin itself comes from the concept of leverage trading. So without leverage, there would be no margin. Therefore, in order to understand margin and margin calls, we first need to discuss leverage.
The idea of leverage is directly related to the notion of trading capital, or trading equity. The capital that you have for trading which is also known as your trading equity is the amount of money that you deposit into your trading account. This is the money that you want to take into the forex market and have it potentially exposed to the risks of the foreign exchange market.
This amount of money is one of the most important factors in the outcome of your trading process. It is a very clear notion. The more money you have, the more profits you can potentially obtain if you are successful in your trading process. In fact, there are even certain trading strategies and approaches that require a high trading capital compared to certain other strategies.
The case for having a high trading capital is quite clear. The question is, how do you increase your trading capital if you do not have a lot of money at your disposal?
One of the best and most common methods of increasing your trading capital is through the use of leverage.
Leverage is basically the money that the broker will lend to you for trading. But hint the word “lend.” Naturally, there ought to be something for the broker as well. First of all, you use the leveraged capital within the account you have with the broker. In this way, the broker can be assured that you cannot just withdraw the money. It is only for trading.
The leverage is provided to traders in the form of a multiplication of their initial equity or initial deposit. So for instance, one of the common ratios of leverage, which is also the acceptable rate of leverage in the European Union zone, is a leverage of 30:1 which means you will get 30 times your initial deposit as the leveraged amount.
But you are not just given the leverage with no assurances. You have to put up an amount as collateral, which is called margin.
The level of margin can vary according to the leverage that you receive. But in any case, when you want to use leverage, you have to deposit some money in your account to be used as leverage. Let’s take a closer look at the margin.
You should read: Forex Robot Development and Trends in 2024
What Is Margin Level?
As we mentioned, a margin level is the amount of money that you need to lock in your account as collateral for receiving leverage. So in order to receive the leverage, you need to deposit some money in your account to be used as the margin level.
Margin level is basically a percentage of your total leverage that you want to receive. For instance, the margin level can be as little as 1% or 2% or even a little bit higher such as 5%, 10%, or even 20%. In either case, you need to have that much money in your account to meet the margin requirements.
You can begin trading with the leverage that you receive. And you are of course allowed to lose. Losing is part of the trading process. Sometimes it cannot even be avoided. You can lose as much as the margin level when you are using leveraged trading.
But you cannot lose the leverage. After all, the broker does not want to lose its money. This is where we face a margin call.
You should read: Maximizing Efficiency Running Multiple Forex Robots in 2024
What Is a Margin Call and When Does It Happen?
So when you keep losing money with your leverage you will eventually run out of your margin levels that you deposit in the beginning. What happens when you lose all of your margin? Well, the broker will definitely not lose money. So you will never actually be able to lose the leverage in the process of trading.
When you have lost 100% of the margin level, then you will receive a margin call. A margin call is almost literally a call or a notification in different forms. This is when the broker will tell you to increase your account balance in order to have more margin so you can continue trading with leverage.
When do you receive a margin call? It is not always when you lose 100% of your margin level. It can even be lower. This depends on the broker. So perhaps, you will receive notifications at different points, such as at 50% or 80% of your margin level having been lost.
There are different steps you can take in order to avoid a margin call. The most important of them are the skills and techniques you implement while trading with leverage.
You need to have sufficient risk management techniques and also a proper and profitable trading strategy so that your overall result in trading is one of profit.
You should read: A few steps to creating a professional trading personality
Conclusion
A margin call is a notion related to leverage trading. Leverage is the money that a broker will lend to you for trading. But this leverage is given to you in exchange for a collateral that is called margin. A margin level is almost always a percentage of the total leverage you receive. In this article we fully discussed the notion of a margin call in the forex market.
