What is a Margin Call?

What is a Margin Call? Lesson No 36

Okay, so what is the “Margin Call Level” in forex trading?

Consider the Margin Call Level to be a defined point at which you will arrive while trading forex. It’s like a warning sign, saying, “Hey, you might need to be careful here.”

When your Margin Level reaches this limit, all your trades may be closed automatically. It’s referred to as being “liquidated.”

Consider the Margin Level as a measurement, of which the Margin Call Level is only one specific value.

Yes, I am aware that the names can be unclear. Hey, we didn’t even think of them!

For example, the Margin Call Level of some forex brokers may be set to 100%.


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Imagine you have a Forex trading account. You will receive a ‘ Margin Call ‘ if your Margin Level falls to 100% or lower.

Margin Call

So, what exactly is a Margin Call? It occurs when your broker informs you that your Margin Level has dropped below the minimum needed level, known as the ‘Margin Call Level’. Previously, brokers used to make this notification through phone calls, but currently, it’s often carried out via email or text message

But why is this such a big deal? It’s because a Margin Call indicates that your floating losses exceed the margin in your account. This effectively indicates that your account equity is smaller than the margin you used because the losses reduce your equity.

Margin Call Level vs. Margin Call

Let’s clarify something that sometimes confuses traders: the Margin Call Level and the Margin Call itself.

First, your trader sets the ‘Margin Call Level’. When your Margin Level reaches this level, it starts a ‘Margin Call’. It’s similar to a checkpoint, set at a specific percentage of your Margin Level. For example, when your margin level reaches 100 percent.

So, what is a ‘Margin Call’? It is an event. When this occurs, your broker takes action, typically by emailing you a message. This event occurs only when your margin level falls below the Margin Call Level.

Think about it as boiling water. The Margin Call Level is similar to the temperature at which water boils, 100°C. Your Margin Level is similar to the temperature, which can range from 0°C to 89°C. When a Margin Call arises, it is similar to water boiling, when a liquid transforms into vapor.

Example

Suppose your Forex broker sets the Margin Call Level to 100%.

This means that your trading platform will alert you if your Margin Level reaches 100%.

When your account’s Margin Level reaches 100%, you cannot open new positions and must close existing ones.

A margin call level of 100% indicates that your equity equals or is less than your used margin.

This is because your open positions are losing money.

For example, if you have a $1,000 account and open a EUR/USD position with one mini lot (10,000 units) requiring a $200 margin, your Used Margin will be $200.

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At this point, your trading is not going well, and you are losing money quickly.

It’s losing by a large margin (you’re not doing well at all).

You are currently down 800 pips. With each pip costing $1, you’ve lost $800!

So your equity is now $200.

Equity = Balance + Floating P/L

$200 = $1000 – $800

Equity is determined as the sum of the balance and the floating profit/loss.

In this scenario, $200 equals $1000 minus $800.

Your margin level is now 100%.

Margin Level = (Equity / Used Margin) x 100%

100% = ($200 / $200) x 100%

Margin Level is derived by multiplying (Equity/Used Margin) by 100%.

So, 100% = ($200 / $200) x 100%

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When your Margin Level reaches 100%, you cannot open new positions unless:

  • The market moves in your favour.
  • Your equity rises above your used margin.

If #1 does not occur, you can only complete #2 by:

  • Adding more funds to your account.
  • We are closing existing positions.

You cannot initiate new positions once your Margin Level exceeds 100%.

What if your bad trade continues to go wrong?

If this happens and your Margin Level falls below ANOTHER specified level, the broker will close your position.

This level is known as the Stop Out limit and changes depending on the broker.

If a Margin Call is like boiling water, then a stop-out is like getting burned by it!

Now, let’s dig more into what the Stop Out Level means. Stay tuned with us for our next lesson!