What is a margin call in forex?
If you understand how a margin works, you should be able to explain what a margin call is.
Before we proceed, do you still remember what a margin is? If not, let me remind you.
A margin is the amount of money that a trader needs to enter a trade.
Do not get it wrong. A margin is different from a trading capital. Trading capital refers to a money deposit a trader is willing to trade with.
While a margin is only a portion of trading capital that a broker sets aside for a trader to initiate his trade.
If you would love to know more about a margin, kindly refer to our article on what a margin is.
What is Margin Call in Forex?
Remember that a margin helps a trader limit his potential loss.
Also, it is a portion of his trading account balance that a broker sets aside to initiate a trade.
A Margin call is a notification that a broker gives a trader once his trading loss is closer to his margin.
When a trader places a trade, he has the potential of winning or losing such a trade.
However, the extent of his profit or loss depends on his understanding of market analysis and risk management.
When a trader”s loss is set towards his margin value, he receives a notification from his broker to fund his account.
If he fails to fund such an account or close such a trade, his trade will close automatically once his loss reaches the margin point.
Lastly, traders believe that once your trade triggers a margin call, you will likely lose such a trade.
Advantages & Disadvantages Of A Margin Call.
The major advantage of a margin call is that it helps to notify a trader about an impending loss.
Once a trader gets a margin call, his broker orders him to either fund his account or close his trade.
If he fails to do so, his trade will close automatically once the price hits his margin value and he will lose all his money.
Also, the margin call is usually in form of emails or text messages.
In addition, the margin call will serve as a reminder for a trader to secure his capital.
The major disadvantage of a margin call is that it comes when a trader is already losing his trade.
Like I said earlier, many traders believe that once your trade triggers a margin call, there is a very high probability that you will lose the trade.
A margin call is a very important part of trading that every trader should know about.
How To Avoid A Margin Call.
The most important way of avoiding a margin call is by using proper risk management.
The forex market is full of greedy traders who lack proper risk management. A greedy trader will always find it difficult to make reasonable profits off the market.
A trader will understand that he needs to use low leverage by ensuring proper risk management.
Remember that margin and leverage relate directly. The higher the leverage, the higher the margin and vice versa.
For a trader to avoid getting a margin call, he has to make sure that he is using the suitable leverage value for his trade.
Another precaution under risk management that a trader needs to follow is always using a stop-loss.
A trader once said, “A trader without a stop-loss is like a warrior without ammunition”.
The stop-loss order helps to minimize risk when a trader places a trade.
Many traders find it hard to set a stop-loss to their trade, so they lose excessively in the forex market.
Proper risk management remains the only way by which a trader can avoid a margin call in the forex market.
Frequently Asked Questions(FAQs).
A trader can avoid a margin call by using proper risk management.
To use proper risk management, he needs to use low leverage, stop-loss, and so on.
When a trader fails to respond to a margin call, the trade will close once the price hits his margin value, and he will lose his trading capital.
A margin call is a notification that a broker gives a trader to either fund his account or close his trade once the price is about to hit his margin value.
A margin call is a notification from a broker to a trader to close his trade or fund his account once the price is about to hit his margin value.
When a trader fails to act according to a margin call, his trade will close automatically once the price hits the margin value, and he will lose his capital.
Also, many traders believe that once a trade triggers a margin call, it is more likely to end in a loss.
The best way to avoid a margin call is by using proper risk management.
This includes using low leverage, stop-loss, and so on.
Congratulations on reading to this point. I expect you to understand what a margin call in forex trading is all about.
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