Getting a margin call when trading Forex can feel like being called into the principal’s office. You don’t want it to happen, and the pit that you feel in your stomach is much the same feeling that a school child being called into that office may feel. The only thing that you can do to avoid this is to know what a margin call is and some basic steps to avoid a margin call.
What Is a Margin Call?
Most traders use at least some leverage in their trades. This means that they essentially borrow money from their broker to execute their trades. It is the only way that most people have the power to get enough funds into a trade to really make a difference. In other words, they need to borrow the leverage to make trading worthwhile to the bottom line of their account. Thus, they take out margin to make it happen.
A margin call happens when the trader gets overextended on their trades and has to have their positions automatically liquidated to cover the margin requirements that they have for that trade. It is terrible because it means that they are forced to vacate their position at a moment when it is clearly working against them. As terrible as that is, it is something to be aware of so you can avoid a margin call and keep yourself from landing in this situation yourself.
Avoid a Margin Call: Know Your Margin Requirements Before Entering a Trade
There is no question that you should know what the margin requirements are for any trade before entering that trade. You can think of them as barriers to entry before getting into a trade. Think of a nightclub that charges a cover fee to get into the club. You don’t get into the club without paying that fee. A margin requirement works in a similar way. You are not paying a fee for the trade (there are no commissions in Forex trading), but you do have to have a certain amount of liquid capital available in your account before placing a trade.
If you buy too many lots or trade too big as it were, then you run the risk of hitting your margin limits very quickly if the trade starts to move against you. If you bump up against those margin limits, then you should fully expect that the broker will execute a margin call against you, and you will be left trying to figure out how to recoup funds that you have now lost. The margin call will trigger a sale of your position, and the losses that you took on will now be locked in.
Use Stop Orders to Prevent Margin Calls
Stop orders can help you get out of a trade long before it ever gets to the point where you are called out for hitting your margin requirements. These stop orders allow you to exit your trades on your own terms at the limits that you feel are appropriate when you set up the trade.
A stop-loss order lets you set a certain limit for how many pips you will accept as a loss before bailing on the trade altogether. You may also set them to execute at a set price depending on what you feel is right for your trades. The point is, you are in control of your destiny as far as when you will leave the trade. You don’t have to worry that a margin call will come for you and take away those profits that you have worked so hard for.
Enter Into Positions with Only Some of Your Buying Power
Just because you have the ability to purchase a high amount of a currency pair does not mean that you always should right off the bat. Let’s say you feel strongly that you should be short the AUD/USD. You have the margin to get into this position for 100,000 units worth of trade. That doesn’t necessarily mean that is what you should do though. Just because the broker has given you this much slack doesn’t mean you have to use it. Why not scale into the position in a more sustainable way? That is what some do by deciding that they will purchase something like 10,000 or 20,000 units worth of the short position and see how it goes from there. They are always welcome to up their position as time goes on. At least with a smaller amount of currency in hand in the beginning, they will not put as much risk on the table right from the start.
Always Practice Risk Management
Risk management means always keeping an eye on the available balance that you have, and judging how much you can reasonably risk on a specific trade without things getting totally out of hand. People don’t love to be told to curtail their behavior, but sometimes that is exactly what it called for to avoid the worst possible outcomes. People need to know that they should always think of the downsides of their trades as much as the upsides. They don’t need to risk it all on one trade just because they could make a nice profit if it all works out. The reality is that it could backfire the other way as well, and then they will be left upset that they did not make better choices, and their account will be seriously damaged going forward. That is not ideal, and it is not the spot that most people want to put themselves in.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.