Margin Call is an important call that you as a Forex Trader will have to be familiar with. It is basically a broker's demand on you whom is using margin to trade to top up your account with additional money so that your margin account can be brought up to the minimum safety level. Margin Call will occur when your account reduces to a value lower than that the value calculated by your broker.
For example,if your broker thinks that your position is in danger, maybe with your open position of $100,000 and with a margin of one percent ($1,000). With your losses are approaching your margin of $1,000, your broker is most likely to initiate a Margin Call for you to increase the fund in your account or for you to close your position in order to limit both of your risk.
If you think that you are going to trade using a margin account it is off great importance that you confirm or talk to your broker about their policy on margin account. It is important to know how your broker will handle Margin Call. Would they request you to top up that margin or would they close off your position automatically?
Let's say you have decided to trade with $5,000 in your account with your broker. You then open 3 position (standard lot) of EURUSD, which is $300,000. You would required $3,000 (assumed 1%) as margin for the trades. Your trade goes bad and your record a loss of $2001. From this moment on, your account has a equity balance of $2,999 which is less than your required margin. Your broker in this case may request that you top up your account or even close off your positions by a Margin Call. The reason that your broker may do a Margin Call even though you still have $2,999 in your account is because the broker needs that as a form of security and if they allow you to use it, it could finally endanger both of you.
To look at it in another manner, If you have a $3,000 account, with 1 standard lot open, the margin required will be $1,000. In other words, this $1,000 will not be available for you to use as your trading capital. The $1,000 is still yours, but it is being held in trust for you by your broker as a form of security.
Many discussions have been help on the topic of margin and many argue that too much margin is dangerous. This is a point for YOU to note. It is important to remember as with all trading is concerned, you should thoroughly understand your broker's policies on the subject and you are comfortable with and understand your risk.
Please always remember that you should trade only with money that you can afford to lose and YOU SHOULD NOT trade more than what you can afford to lose. You would like to live to trade another day.
See my post on Money Management.
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