Margin call forex is a scenario in forex trading where a broker demands that a forex trader deposits additional security/cash into her forex account to cover possible losses. A forex trader gets a margin call when the security she is trading devalues to a level that is below the minimum maintenance margin (the minimum amount of security that must be maintained in a margin account); and when a margin account is below the minimum maintenance margin, the trader is expected to deposit further security to keep the position open, otherwise, it will be closed.
MARGIN CALL, MARGIN ACCOUNT
With a margin account, a trader who has a trade capital of 2,000USD can trade like she has 100,000USD. The trader provides a minor percentage of the money needed for the trade while her broker provides the rest of it. In a typical situation, the trader agrees with her broker on the percentage she can pay into her account; a percentage that must be maintained as the minimum maintenance margin for the account to remain open. As a result of a lot of factors in the forex market, the value of security often fluctuates. If the fluctuation of security is negative such that the value of the security is below what is required to maintain the account, the broker makes a margin call.
CAUSES OF A MARGIN CALL
In forex trading, you can never be so sure; but most often than not, a margin call is detrimental to a trader. It is important that traders understands the causes of a margin call, so that they would know how to stay away from it.
In simple terms, a margin call is caused by the unavailability of usable margin. Here are some factors that may lead to unavailability of usable margin
- Not knowing when to let go of unfavorable trades. If a trader holds on to a losing trade, it depletes her usable margin, probably to a point where the usable margin is no longer up to the minimum maintenance margin.
- An underfunded account can lead to a margin call because there was not enough usable margin from the beginning.
- Overleveraging your account, probably to hold open a position in a losing trade, can result to a margin call. The trade is not favorable and you still want to borrow money to put into it? That is not wise.
Margin accounts are good for forex traders, just like other trading tools in the market; but be wise. It is not an opportunity to be abused, or you will get a margin call.
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