How to Avoid Margin Call Forex
AVOID MARGIN CALL IN FOREX!!!! Something you have probably encountered often in your forex trading journey, but how to avoid margin call in forex is the question, or how to get rid of a margin call and keep your account secure?
Forex trading is a world full of opportunities but it comes with equally immense risks. Margin call is a term every trader dreads and hopes for it not to happen. In simple words, a margin call is a notification from your broker that the account’s equity has fallen below the required margin level. If a margin call is not managed carefully, it can result in significant losses or even wipe out your trading account. In this article, we will explore actionable strategies to avoid margin calls, keeping your forex trading journey smooth and profitable.
What is a Margin Call in Forex?
Forex trading involves trading with leverage, which allows them to control a larger position with a smaller amount of capital, and margin is the amount of money required to open and maintain a leveraged position. Simply, when an account’s equity (balance + Floating profit/loss) drops below the required or predetermined margin level, a margin call occurs. If a trader fails to meet this requirement either by adding additional funds or closing positions, the broker may liquidate(Stop Out) the trades to recover losses.
Margin calls can lead to force liquidation where brokers close all of the trader’s positions at unfavorable prices, amplifying losses. Resulting in a wiped-out account and that typically means missing numerous trading opportunities. This experience can cause emotional stress that can lead to fear-based trading decisions.
How to Avoid Margin Call in Forex?
Here are some strategies you can consider to avoid margin calls in forex.
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Use Leverage Wisely: Leverage is a double-edged sword. It helps you amplify profits, but at the same time, it can magnify risks for losses. There are two different scenarios in this case:
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When you use high leverage: Let’s suppose you open a trading position of USD/CAD with a $400,000 position value (4 lots) with a $1,000 margin using 1:2000 leverage. A 25-pip market movement against you would simply mean $1,000 loss and wiping out your entire margin.
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When you use low leverage: In this scenario, you open a $10,000 position (0.1 lot) with $1,000 margin using 1:200 leverage. A 25-pip unfavorable market movement would only reduce your account equity by $25, leaving more room for market fluctuations.
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Maintain a Healthy Margin Level at All Times: Regularly monitor your margin level to ensure it stays well above the requirements. An advisable and considerable amount is to maintain a margin level above 200%. For instance, if the margin requirement is $1,000 and your account equity is $3,000, this means your margin level is 300%, which is a safe zone for your account.
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Implement a Solid Risk Management Plan: A proper risk management plan is key to avoiding margin calls in forex. For example, if a trader buys EUR/USD at 1.1000 with a 50-pip stop loss, their maximum loss per lot (100,000 units) is $500, meaning 50 pips × $10 per pip. Traders can also move cautiously and risk no more than 1-2% of their trading account on a single trade, such as if their account balance is $10,000, then their maximum risk per trade should be $100-$200.
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Monitor Market Volatility: Volatile markets can quickly cause margin calls. Traders should keep an eye on economic events, news, and other data releases that can trigger market movements. Using tools like economic calendars, avoiding trading during high-impact events, and following the news can keep traders prepared for the risk.
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Keep Extra Funds: Traders should keep additional funds as a margin buffer in their account to act as a cushion against unexpected losses.
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Review Trades: Traders should regularly review their open positions and adjust them as necessary. For example, traders can exit a trade early if the market conditions suggest so, even if their trade is near the stop loss.
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Choose the Right Broker: Last but not least, traders should choose a reliable broker with transparent margin requirements and accurate stop-out levels.
Test Yourself
Imagine you have a $10,000 account and open a (5 Standard Lots) $500,000 position in USDCAD with 50:1 leverage. A 100-pip loss equals $5000. If your margin level drops below the broker’s requirement, say $5,000 in equity, what should you do?
Option A: Add funds to your account.
Option B: Close some positions to reduce margin usage.
Option C: Do nothing and wait.
Answer: A combination of A and B is ideal. Always act proactively to avoid forced liquidation.
