If you are a forex trader or aspire to become one, then understanding what is a margin call will also require you to learn about leverage. Retail forex traders typically use leverage to trade some multiple of the funds they deposit in a forex trading account with a broker. These deposited funds serve as margin or collateral to protect the broker against possible losses the trader might incur on positions taken via the broker.
Trading with leverage in a margin account allows retail forex traders to take on much larger positions with a fraction of the capital they would otherwise require. Margin accounts allow retail forex traders to use leverage to amplify their risks and potential returns (or losses) when trading currencies.
This article examines what a margin call in forex entails and how you can avoid getting one. It also discusses the appropriate use of margin in forex trading.
What Is Margin and Why Is it Important?
What is a margin call? Margin is the minimum amount of money or collateral you need to deposit in your trading account to hold a particular leveraged forex position.
When trading in a margin account as an online forex trader, your trading platform will generally show you the funds or equity you deposited into the account. It will also usually show a “used margin” column that refers to the amount of margin you presently have tied up with open trading positions, as well as a “usable margin” or “margin available” column that shows how much additional margin you have available to take new trading positions with.
The available margin in your trading account will equal the funds deposited in your account minus the amount of margin applied as security to hold any positions you may have outstanding. If no positions are outstanding, then the amount of available margin would be equal to the funds deposited in your account.
Once you’ve established a leveraged forex position, the amount of usable margin in your trading account would decline by the amount of margin required by your broker for you to maintain the position.
How Does a Margin Call Work?
A margin call is a communication from your broker, traditionally done by telephone, to tell you that you need to deposit additional funds into your margin trading account to continue to hold your outstanding positions.
If you do not deposit those required funds by the deadline specified in the margin call, then your positions may be closed out by your broker. This situation can occur because your margin deposit is no longer deemed to be adequate collateral to protect the broker against your accrued or potential losses.
Margin calls usually occur after a position has lost money due to an adverse market move, although margin calls can sometimes arise when a broker or exchange reduces the allowed amount of leverage for a particular asset you are holding a position in.
Your account equity equals the total net value of your forex trading account including your deposited funds and any trading gains or losses. As long as the amount of equity in your trading account exceeds the used margin, you will generally avoid getting a margin call regarding your account. If your used margin exceeds the equity in your account, however, then you would likely be subject to a margin call from your broker.
Keep in mind that some online forex brokers will close out all open positions in your account automatically if your used margin exceeds or approaches your account equity rather than give you the courtesy of a margin call. To avoid such unpleasant surprises, you should check what your forex broker’s policy is regarding margin calls and automatic closeouts.
As an example of how a margin call works, consider the situation where you open a margin trading account with a $10,000 deposit. Your equity and usable margin would both be $10,000 until you open a trading position. If you then execute a forex trade to establish a position that uses $1,000 of the available margin in the account, your usable margin would immediately decline by $1,000 to $9,000.
As you continue executing forex trades without closing any out, your usable margin will probably continue falling until your account equity can no longer support you taking any further positions. At this point, your usable margin will be $0 and your used margin will be at least $10,000.
Once you reach a state of $0 usable margin, if one or more of your trading positions begins to perform negatively so that your account equity falls below zero, then you may receive a margin call from your broker asking that you bring your account equity back above zero.
Satisfying a margin call to avoid a close-out action by your broker would typically require you to deposit the difference between the total margin used and your account equity. The account equity includes the net unrealized gains and losses from open trading positions and any cash remaining in your trading account.
Margin Call Example
For example, if the required margin of your currency trading positions had increased to $11,000 while your account equity remains steady at $10,000, you have a negative -$1,000 margin balance. You might then get a forex margin call to deposit an additional $1,000 into your FX account, although many online forex brokers will just close out all of your trading positions if this negative margin balance situation occurs.
Keep in mind that a margin call will require you to quickly deposit the difference between your account equity and the margin required by your positions or have your positions closed by your broker.
You might receive a margin call or experience an automatic closeout of your positions whenever your used margin exceeds the available equity in your trading account.
Do You Lose Money on a Margin Call?
In most situations, receiving a margin call would imply that you either have too many open positions or that one or more of your open positions are losing enough money to deplete your trading account to the point of exhaustion.
Margin calls typically occur when your open positions have lost money overall, so you may indeed lose money when faced with a margin call. This factor is especially problematic when you choose to ignore the margin call so your positions get closed out by your broker at a net loss to you.
Whether you lose money on a particular margin call, however, will depend in large part on how you respond to the call and what happens afterward. When faced with a margin call, you can choose to meet it by depositing the required amount of funds, or you can liquidate all or a part of your position to meet the margin call.
If you do meet the margin call by depositing the required additional funds into your trading account, you might still make money on the position if the market then trades in your favor afterward. Conversely, if you meet the margin call and the market value continues to trade against your position, you would eventually just get another margin call and lose even more money.
According to some experienced traders, if you do get a margin call, then you are positioned on the wrong side of the market and should liquidate the position immediately. You might even want to trade in the opposite direction to the losing position that caused the margin call to potentially make back some of your losses.
How Long Can You Stay in a Margin Call?
A margin call is generally an urgent request for funds from your broker, so you cannot stay in a margin call situation for very long. Make sure you check with your forex broker to see if they even provide margin calls and what their margin call policy is, including how long you have to respond once you receive a margin call.
Some forex brokers will give a margin call instructing the receiving trader to fund their account quickly with the required amount of money or liquidate their losing positions. Still, many online forex brokers do not even provide the courtesy of a margin call before automatically closing out all of the open positions in your forex account once your usable margin heads toward or goes into negative territory.
Once your usable margin hits or approaches the zero level, if your positions are not immediately liquidated by your broker, then you have very little time to add more funds to the account or liquidate positions yourself to satisfy a margin call you have received from your forex broker.
Some brokers that provide margin calls will also notify traders when their account gets near the point where they will receive a margin call using margin call levels. This process lets you take action to rectify a funding issue with your trading account voluntarily before a margin call requires it.
What Is a Safe Margin Level to Trade Forex?
A safe margin level to use when trading forex will generally depend on an individual trader’s psychological profile and risk tolerance that will influence the risk management measures included in their trading plan.
A low margin rate implies a higher leverage ratio and hence that more risk can be taken for a given margin deposit. In contrast, a high margin rate implies a lower leverage ratio and that less risk can be taken given a certain deposit.
Some jurisdictions prevent the use of excessively low margin rates among retail forex traders by legally limiting the leverage ratios available at online forex brokers servicing clients in their locales to relatively safe levels.
For example, U.S. retail forex traders are limited to a 50:1 leverage ratio and European retail forex traders can use a leverage ratio of up to 30:1. In contrast, some offshore online forex brokers allow their clients to use much higher leverage ratios of up to 1,000:1.
When operating in a less-regulated jurisdiction that does not have a capped leverage ratio, many forex traders might feel comfortable with the risk level involved in using a 0.5% margin rate that implies a leverage ratio of 200:1, while more conservative traders might feel safer using a 1% margin rate or 100:1 leverage ratio.
Can I Trade Forex Without Margin?
You can definitely trade forex without using margin. In fact, transactions occurring in the Interbank forex market are generally done based on credit lines extended between market makers and their counterparties instead of using margin accounts.
Such counterparties can include high net-worth individuals who financial institutions consider sufficiently creditworthy to extend them lines of credit to make forex transactions with. Most retail forex traders are not sufficiently good credit risks to have access to this sort of privilege, so they instead need to use margin trading accounts opened with online forex brokers.
While these smaller traders can theoretically avoid using leverage when making forex transactions, they would probably not be able to make a worthwhile profit doing so — even if their market view turns out to be correct — given the rather low volatility levels commonly seen in the forex market.
Accordingly, the main reason that most retail forex traders use leverage and trade on margin is that very few significant profits can be made trading in small amounts of currency without a margin account.
To illustrate this fact, consider a situation where you bought only 1,000 units of currency of the EU euro against the U.S. dollar at 1.0500. If the EUR/USD exchange rate then increased to 1.0600, your profit would be 100 pips or just $10.00, which seems hardly worth your time.
If a similar trade was instead done in 50,000 euros on a leveraged basis using a 2% margin rate or 50:1 leverage ratio, then your profit for the transaction would be a far more interesting $500.
Margin Call Example
To receive a margin call, your trading positions would typically need to have shown enough losses to eat up all of your usable account margin. As an example of this situation, let's assume you have deposited $1,000 into a forex margin trading account.
If the positions in your account have caused the account equity to approach zero, implying a total loss of the initial deposit of $1,000 and any other trading gains, then your broker would likely issue a margin call.
Depending on the broker’s policy for making margin calls, you may first receive a warning that a margin call may soon be made on your account, typically occurring when your account nears the margin call level.
If you have been advised by your broker that your account is approaching the margin call level, you can then adjust your account to avoid a margin call by depositing more funds or liquidating losing positions from the account.
Margin Call Level vs. Margin Call
The margin call level is the level of equity in a margin account where you’re at risk of having your positions liquidated by the broker if a margin call is made. The margin call level varies from broker to broker, so check their terms and conditions. This level may also depend on the volatility of the specific currency pairs you’re trading.
For some brokers, if your account equity has declined in value by 80%, then you may be advised that your account has reached the margin call level. Even among those brokers that offer such a courtesy, most will not guarantee that you will be advised if your account approaches this margin call level.
Once your account equity has reached the 100% level of losses, a margin call ensues. Due to the nature and volatility of the forex market, however, most online forex brokers will close out all positions in the account at the 100% loss level without notifying you beforehand.
Depending on the broker and your outstanding positions, the broker may instead liquidate just enough of your positions to meet the margin call instead of closing out all positions in the account.
How to Avoid Getting a Margin Call
The best way to avoid getting a margin call is to trade carefully and incorporate prudent money management techniques into your trading plan. Trading techniques such as position sizing appropriately relative to the size of your account and trading with stop-loss orders can significantly reduce your risk of getting a margin call.
Keep in mind that many online forex brokers will close out or liquidate some or all of your positions immediately once your account reaches a stop-out level that is usually set at the point where your equity falls below a specific percent of your used margin.
An automatic liquidation typically occurs if your margin level falls to the percent level specified by your broker. It then results in one or all of your open positions being automatically liquidated by your broker.
Online brokers often insist on the right to perform this type of unilateral liquidation in their terms and conditions because they require sufficient collateral to allow a trader to hold open positions in case the trader loses money and refuses to deposit more funds to cover their losses.
An online broker’s typical policy is that if a retail trader’s account does not have enough margin to support its open positions, then their positions should be closed out automatically to prevent further losses for the trader and the broker instead of wasting time issuing a margin call and waiting for a response.
What You Can Do if You Get a Margin Call
If your account’s equity has been depleted to the point of getting a margin call, you will first need to respond quickly and prudently to the loss situation you are facing. You may also want to re-evaluate your trading plan and determine what steps you can take to revise your plan to avoid getting another margin call.
As Wall Street legend and day trading pioneer Jesse Livermore once wrote, “Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep the money for another day.” Overall, that advice makes a lot of sense.
Frequently Asked Questions
What causes a margin call in forex?
The cause of a forex margin call is the depletion of equity in the trading account. In most cases, this arises because one or more forex trading positions are showing losses.
Do I have to pay back a margin call?
Yes, you must liquidate positions or add additional funds to your account immediately upon receiving a margin call.
What time do margin calls go out?
Margin calls occur immediately once your account equity reaches a certain level.