Forex Trading Margin Call Full Explain By Forex Forum.
Margin call, a term often met with dread, carries with it some heavy-duty meaning in forex trading.
A margin call occurs when a trading account no longer has any free margin. It is a request from the broker to bring margin deposits up to the initial margin level, also known as deposit margin, to keep existing positions open.
Trading on margin offers a variety of benefits, as well as some additional risks, including margin calls. In order to avoid receiving a margin call, knowing how to define margin and leverage, often misunderstood concepts, is essential.
Margin is the minimum amount of money required for a trader to open and maintain a new position. Put in other words, it is a percentage of the full amount of a position, set aside and assigned as a margin deposit, enabling you to keep your open positions with your forex broker. Normally, forex brokers will require anything from a low margin of 0.25% up to 2% or even higher.
The amount of margin required depends on the currency pair and discretion of the broker.
The percentage is referred to as the margin requirement.
What is margin call?
A margin call occurs when a trader is told that their brokerage balance has dropped below the minimum equity amounts mandated by margin requirements. Traders who get a margin call must quickly deposit more cash or securities into their account. If they don't, the firm may begin liquidating the trader's positions to cover margin requirements. Margin calls only apply to traders who trade "on margin," which means that they use borrowed funds to trade.
How to Calculate Forex Margin
Let's say a broker offers leverage of 1:20 for Forex trading. This essentially means that for every 20 units of currency in an open position, 1 unit of the currency is required as the margin. In other words, if the size of your desired Forex position was $20, the margin would be $1.
Therefore, in this example, the margin is equal to 1/20 or 5%.
To demonstrate this the other way around, if we knew that a broker required a margin of 10%, we could calculate that for every $10 we want to trade, we have to supply $1 of margin. In other words, in this example, we could leverage our trade 1:10.
The difference between leverage and margin in forex
Another concept that is important to understand is the difference between forex margin and leverage. Forex margin and leverage are related, but they have different meanings. We have already discussed what forex margin is. It is the deposit needed to place a trade and keep a position open. Leverage, on the other hand, enables you to trade larger position sizes with a smaller capital outlay. You can join a forex forum for learn proper about forex trading and forex margin cell. Because, inside a forex forum, forex experts share their valuable knowledge.
A leverage ratio of 30:1 means that a trader can control a trade worth 30 times their initial investment. If a trader has $5,000 available to open a trade, they can effectively control a position with a total value of $150,000 if the leverage ratio is 30:1. In forex trading, leverage is related to the forex margin rate which tells a trader what percentage of the total trade value is required to enter the trade. So, if the forex margin is 3.3%, then the leverage available from the broker is 30:1. If the forex margin is 5%, then the leverage available from the broker is 20:1. A forex margin of 10% equates to a leverage of 10:1.
- 2:1 leverage = 50% margin
- 5:1 leverage = 20%margin
- 10:1 leverage = 10% margin
- 20:1 leverage = 5% margin
- 30:1 leverage = 3.3333% margin
For learn more about forex leverage click here...
Why are stop orders important?
A stop order, or stop loss, starts to close your open positions if it reaches a price you have set. This means that when a trade goes against you, it can automatically be closed before the losses grow too large and the possibility of a margin call occurs.
A stop-loss order limits the risk. If you Buy an asset at $100 per unit, a stop-loss order automatically starts to Sell when the price falls to the limit you set, for example below $95. If you are going short, you set the stop loss order at a higher price, say $105, in case the trade goes against you.
Why do you need to avoid margin call in forex?
The initial job of traders is to protect their trading capital. If that gets wiped out, there are no more trades to have. And this is where the stop losses come in; it pulls traders out of the market when they are proved incorrect in their analysis. Also, this is one of the main reasons why it is important to keep the margin under control. Traders might not be wrong with their position in the longer term, but if it is too highly levered, they will have no other choice but to leave the market before the trade has worked itself out.
As trades take care of the margin, they give the trade a place to breathe. Above all, it offers traders a chance to become successful. Trades can't avoid losing trades, so placing massive positions is an excellent way to lose the money and blow the whole account. Always remember that professional traders constantly worry about protecting their accounts. And if they place intelligent trades and follow a statistically profitable system, the gains will come eventually.
How to avoid margin calls
You're not required to have a margin account, and you could easily avoid margin calls by only trading with cash. "The best way to avoid a margin call is to simply not use all your margin limit," says Farrington. Margin is not needed to achieve solid, consistent returns over time, but for those that choose to use it, here are a few things you can do to avoid a margin call:
1. Keep cash on hand. One of the easiest ways to address a margin call is by adding cash to the account. However, if you do not keep enough cash on hand, this may be difficult.
2. Stop loss orders. Entering a stop loss order can help limit losses and, depending on the volatility that day, it could prevent the stock from falling far enough to trigger a margin call.
3. Stay informed. It is a best practice not to check on your investing account on a daily basis; however, this changes with a margin account due to the higher levels of risk. Investors may want to consider adding alerts should the price fall within a certain range.
4. Use your margin limits wisely. Just because you're given the ability to take out a large margin loan doesn't mean that you have to. If you're using margin, consider using less than the maximum amount — this would give you a larger share of equity and a bigger cushion to avoid a margin call.
If you trade with an appropriate amount of leverage, restrict your risk-per-trade to no more than 2%, size your positions appropriately and never open more than a couple of positions at any one time, it is nearly impossible to receive a margin call. Proper risk management is the difference between successful trading and gambling. Perfect risk management and you will be well on the path to becoming a profitable and successful forex trader.
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