What is Margin Call in Forex?

  • Margin call in forex trading is a notification from a forex broker
  • It occurs when an investor’s trading account runs too low on funds
  • Forex brokers have a margin requirement below which the margin call occurs
  • The forex trader is required to deposit more money to maintain sufficient margins
  • The broker may be forced to trigger a stop out if the investor continues to lose on open trades and does not deposit more money.

In forex trading, a margin call refers to a situation in which a forex broker sends notification to the investor informing them that their margin level is depleting as a result of an unrealized loss. As you can remember in our lesson on leverage, we said that forex traders operate on borrowed money. When the margin account of the trader goes below the margin requirement of the forex broker, the broker notifies the investor through a margin call.

Through the margin call, the Forex broker informs the trader to either deposit more funds to maintain the required margin, or close the losing amount to avoid further losses.

When this occurs, the forex trader may decide to deposit more funds if they strongly believe that the losing trade will find a new reversal trend. However, if the losing position looks to make further losses, it is wise to close that trade and look for better opportunities.

Read how to stop loss in forex trading.

Forex traders often operate on margin because they combine their funds with borrowed money from the broker. As a forex investor, you deposit a very small amount of money and borrow a larger sum from the broker to capitalize on higher profits through leveraged trading. The margin call is initiated when the amount deposited by the investor falls below a certain level, known as the maintenance level, margin requirement, or maintenance margin.

The trader’s account is liquidated if they fail to increase the amount needed to match the maintenance margin. Most financial industry regulators require forex traders to maintain a margin level of 25% of the total value of their equity. FX brokers often require higher margins such as 30%, 40%, or 50%.

FXPesa has a margin requirement of 30%. However, the broker triggers a margin call once your margin level falls below 100%. That should remind the trader that their investment is approaching the stop out level.

This means that in FXPesa and other brokerage companies, the margin call occurs when the equity of their account equals the maintenance margin requirement.

An example of margin call in forex trading

Suppose that you deposited $1,000 in your trading account and open two positions that give you a net unrealized loss of $500. Assuming you used a margin of $400, then your actual margin level will be calculated as:

(Account balance – losses)/margin × 100

($1,000 – 500)/400 × 100 = 125%.

Using the margin requirements of FXPesa as an example, the 125% margin level is still high, the margin call will not be triggered yet. However, if you continue making another loss of $120, your new margin level will be:

($1,000 – 500)/520 × 100 = 96.15%.

This margin level of 96.15% will below the 100% margin level, so FXPesa will give you a margin call, notifying you to deposit more funds or close the losing positions.

Other Forex brokers may make a margin call at 50%, and you get stopped out at 40% or 30% margin level.

I would suggest you choose a Forex broker like FXPesa which makes a margin call at 100% margin level so that you get warned well in advance to decide what to do.

The Forex broker should also be communicating the margin call effectively through text, email, or even a phone call to keep you alert. Some forex traders wait until your margin level is below 50% and send an email, which you might not even read. As a result, you get stopped out without even seeing a margin call.

Leave a Reply

Your email address will not be published. Required fields are marked *