How to Avoid a Margin Call

How to Avoid a Margin Call: Lesson No 44

Let’s discuss about Margin trading. It is a strategy for traders with minimal funds who may make large profits or losses. If you don’t understand what margin indicates or what to do if your broker issues a Margin Call, your trading account could suffer a major loss.

Now, let us look at five ways to avoid margin calls.

1. Understand what a margin call is

Okay, let’s discuss what a margin call is and why it’s so important to understand it. When you trade with limited funds, you may meet a margin call, which can lead to serious consequences if you are not prepared. Many newcomer traders concentrate just on charts and technical aspects, ignoring margin needs and equity. If you receive a margin call unexpectedly, it means you haven’t been paying attention to these key details. A margin call occurs when your account has insufficient funds. Your broker will advise you to deposit extra funds into your account to meet the requirements. These days, brokers frequently send you a message rather than a phone call.

2. Know what the margin requirements are even before you place ANY order.

Let’s talk about something really important: knowing the margin required before you begin trading. Most traders don’t consider margin calls, especially while they’re placing pending orders with their broker. You see when you place an order with your broker, it remains open until the price reaches a particular limit or the order expires. But here’s the thing:  placing an existing order does not immediately affect your trading account because the margin is not applied to pending orders.

So, if you place a pending order, it may fill automatically without your permission. If you don’t keep check of your margins, filling that order could result in a margin call, which is terrible news. To avoid this, consider the margin needs before you even place the order. Make sure you have a sufficient margin, and perhaps a little extra just to be cautious. If you have a large number of outstanding orders, things can become confusing, and you may face a margin call if you are not attentive. So, always understand the margin requirements for each trade that you’re thinking about placing.

3. Use stop loss orders or trailing stops to avoid margin calls.

Let me talk about something very important, the Stop-Loss Order. If you are new to it, you might end up losing a large sum of money.

So, what is a stop-loss order? It’s similar to a safety net you set up with your broker. When you place a trade, you also specify a stop-loss order. If the price begins to move against your trade, this order will take action.

Let me give you an example. Assume you’re trading USD/JPY at 110.50 and put your stop loss at 109.50. If the price falls to 109.50, your stop loss order takes effect, and your trade is closed. This helps keep your loss to 100 pips, or $100. 

Consider what would happen if you hadn’t put in a stop loss order and the USD/JPY continued to decrease. Depending on how much money is in your account, you may receive a margin call.

However, using a stop loss order or a trailing stop order, you can protect yourself from significant losses. It’s like having a safety net around your trades to prevent a margin call.”

4. Scale in positions rather than entering all at once.

Another reason why some traders receive margin calls is that they underestimate how prices fluctuate.

Here’s an example. Let’s say you believe the GBP/USD has risen too high and too quickly, and you know that it can’t go higher. So you open a very large short position.

This type of overconfident trading increases the chance of receiving a margin call.

To avoid this, there is a practice known as ‘ scaling in’. Instead of making a large trade of four small lots at once, start with just one. Then, when the price increases in your favor, you can gradually increase your position, or scale in’. 

As you add new positions, you may change the stop losses on your existing positions to restrict potential losses or secure gains. Scaling your investments can help you improve profits while reducing your risk.

Because of the higher margin required, this strategy might require a larger investment. However, by scaling in positions at different price levels and employing separate stop loss settings, you can spread the risk of loss across multiple trades. This reduces your chances of receiving a margin call compared to putting all of your money into one major trade straight away.

5. As a trader, understand what you are doing.

It’s common to hear of inexperienced traders receiving a margin call and having no idea why.

These traders are simply interested in generating money and are unaware of the risks associated with trading.

But you do not want to be like them.

Your main objective should be risk management rather than profit maximization.

“Risk management is essential, which is why we discuss it a lot here.”

Conclusion

To sum up, there are five essential strategies to avoid a margin call:

Pay attention to the currency pairings you trade and the margin requirements that go along with them.

To ensure that you can continue trading the next day, be prepared to absorb losses and know when to cut them.

Recognize fluctuations in the market and keep up with news and happenings that might result in sudden price increases that might put at risk your account.

As a trader, you should always put risk management before profit-chasing.

“You may trade the forex market more confidently and protect your trading account more effectively if you follow to these strategies.”

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