Understanding FOREX Margin Calls

Dealing with FOREX margin can seem like a complicated subject for many. Many FOREX traders go about their trading every day and do not fully understand how margin works. The threat of a margin call is a trader's worst fear. While it can be avoided with the proper money management, accounts are margined out every day in FOREX. Here are the basics of a margin call and how they work. 

Leverage

To fully understand how margin works, you need to first understand how leverage works in FOREX. Leverage allows FOREX traders to control much more than they have in their account. A standard lot is when you buy $100,000 of the currency. Most traders do not have access to $100,000 to trade with. It is for this reason that FOREX brokers instituted high amounts of leverage into their accounts. With FOREX, you can get leverage as high as 500:1 in some cases. Most of the time, you will be offered 100:1 leverage. 

This means that in order to control that $100,000 you only have to have $1000 in your account. This makes FOREX trading much more accessible to the average trader. However, it also creates an increase in risk. You can win big and lose big as a result of margin.

Margin Requirements

Depending on the broker, you will be required to have a different amount of money in your account. This is called the margin requirement. For example, you might have to use 1% of the amount of money that you want to control for each trade. If you fall below the margin amount that is required in your account, it will result in a margin call.

How Margin Calls Work

When you fall below the amount of margin that is required in your account by the broker, they will institute what is called a margin call. This basically means that they will start closing the positions that you have open at the moment until you are back under the margin requirement. Depending on the broker, this could result in them closing only a few positions or closing out the entire account. You will want to make sure that you understand how your broker operates before you get started trading for real.

This is an example of how a margin call works. When you look at your account on your trading platform, you will be presented with a few different figures. You will see your account balance, the equity, the used margin, and the usable margin. When you open up a trade, the amount of money that you open the trade with is the used margin. For example, if you buy one standard lot, and your margin requirement is 1%, it will result in you using $100 of margin. 

The usable margin is always the equity of the account minus the used margin. In this example, it would be $9900. When the equity in the account becomes equal to or less than the used margin, you will receive a margin call. 

blog comments powered by Disqus
Scottrade