To a lot of traders, a margin call is something they want to avoid at all costs. And the only way to become fully aware of it is to understand how it arises or is triggered. Successful trader Jesse Livermore once said, “Never meet a margin call. You are on the wrong side of the market. Why send good money after bad? Keep the money for another day.”
What are Margin and Leverage?
A margin call is related to margin and leverage. Therefore, if you want to understand margin calls, you also need to understand margin and leverage. So what is margin? Leverage? Margin and leverage always come together. Margin is the amount of money that needs to be paid by the trader in order to have a leveraged trade. Leverage, on the other hand, is the one that allows a trader to gain greater exposure to the market without paying the full amount.
But leverage trading doesn’t come free of risks. It potentially allows it to produce a huge amount of profit but also capable of allowing losses. But the risk gets lowered if you have the right trading software like the ones from IRESS and knowledge when it comes to trading.
Margin Call in Forex Trading
A margin call happens when a trader does not have a free margin or usable margin at all that leaves very little room for losses. When a margin call is triggered, it means that the trader needs to have more funding. This usually happens when the trading losses are able to reduce the usable trading margin at an acceptable level according to the preference of the broker.
According to the broker’s point of view, such things are the necessary mechanism to be able to manage the risks effectively. Here are some of the major triggers of margin calls.
- If you hold on to a losing trade for a while that you end up depleting your usable margin.
- If you are over-trading your account and do the first reason.
- If you have an underfunded account prompting you to over-trade using very little usable margin.
- If you trade without stops and the price moves aggressively towards the opposite direction.
What will happen if a margin call happens?
When there is a margin call, the trades of a trader will be closed out or get liquidated. The purpose is said to be in two folds; the trader does not have money on his account to be able to push through with his position and the broker will be on the line for losses, something that’s also bad for the broker. This is what leverage trading is all about. There are a lot of scenarios in which a trader owes more than the deposited amount.
Avoiding Margin Call
Most of the time, leverage is known as a double-edged sword. This statement proves that the larger the leverage you take, the more chance to absorb losses. And more so, the sword gets to cut deeper if you over-leverage your trades. You must also exercise a sensible risk management plan through the use of stops to limit the losses. It is also advisable to ensure a healthy amount of free margin-right into the account so you can stay in your trades. Lastly, trade-in smaller sizes. As much as possible, use reliable trading software like the ones you get from IRESS to avoid mounting trading losses.
