The topic we are going to cover today is one that should be a little spooky for any Forex trader. It is not that a trader should be intimidated by the market, but they should be aware of the dangers that can happen on any trade. A healthy respect for risk is something that makes a trader successful.
What Is a Margin Call Level?
A margin call level is a specific level in a trade when the trader runs the risk of potentially having to liquidate their position in order to cover a margin call placed on it by their broker. This level is hit when the trade moves against the trader in such a way that they are at risk of hitting margin levels that the broker will not approve. In other words, the level has reached a point where the losses are at, near, or just beyond the amount of money that the trader put up initially to cover their trade.
If the trader does not immediately deposit additional funds (to up the amount of margin extended to them) or the trade doesn’t immediately turn around in their favor, then they are at risk of a margin call.
What Is a Margin Call?
Despite the name, a margin call does not typically involve an actual phone call these days. That is once how it was done, but now it is more likely that the trader will receive an e-mail, a text message, or both notifying them of the margin call. If your losses on the trade exceed the amount of locked-in funds allocated for margin on the trade, then you will be notified of the margin call, and your position may be liquidated automatically and without additional notice by the broker. It is not a good feeling because it means that the trade went against you, and that you are very likely guaranteed to face a significant loss on the trade (when it is liquidated by the broker).
What Is the Difference Between the Two?
It is understandable that some people get a little confused about the difference between a margin call and a margin call level. The two terms sound almost the same, and it is easy to think that they are almost too alike. While they do sound similar, you should know that a margin call level is the threshold level of margin that the broker is willing to extend an investor on a specific trade, while the margin call is the liquidation of that trade by the broker is the level is breached.
In other words, one might think of the margin call level as the number that one should never try to breach, and the margin call itself is the consequence for what happens when that level is breached. It is a terrible feeling to have that level breached, and yet it does happen to many novice traders at some point. The best thing to do to avoid this happening to you is to avoid trading beyond the limits that you feel comfortable setting for yourself. If you trade well below your total available margin, then you shouldn’t run the risk of a margin call almost ever.
Trading Small Can Save You from This Outcome
Let’s imagine that you place a $1,000 deposit into your Forex account to begin trading. You are now trading in the market, but you don’t necessarily make a trade that eats up too much of your margin. You simply place a trade to purchase $10,000 worth of EUR/USD. In this scenario, you have only tied down $200 of your available $1,000 on the trade. Unless the trade moves against you in a way where you suffer a loss of $800 (this would be a massive number of pips to lose on this trade), then you should be just fine. You won’t hit the margin level of 100% (a typical level set by most brokers), and your trade will be allowed to carry on. Given this, you should expect that if you trade small you should avoid the pit in your stomach feeling that comes with getting a margin call.