What is a margin call?

What is a margin call?

Perhaps you have not considered why Forex is so successful.

One of the significant advantages of trading in Forex is that the Brokers allow us to operate with “margin” accounts, so when we use undue leverage, we can fall into the margin or Margin Call.

When a Broker allows us to leverage, of 1: 200, 1: 300 or 1: 400, even 1: 888, this means that with 1 unit (base currency, euro-dollar-pound, etc. ), we can buy or sell, 200, 300, 400 … units.

Margin Call

The Broker, in these circumstances, only requires us to have a certain amount of money in the account, which protects any adverse movement of our operation.

While the operation is underway, we will put a certain amount of money, which is automatically dedicated to the operation and cannot be touched, but there is another floating part, which will depend on the movement of the operation; it is the maintenance margin of the operation.

It may happen that “even having money in the account,” the Broker may ask us to increase funds, so as not to have to close open operations, this is what is called entering Margin Call, or call on the sidelines.

How to calculate the necessary margin for an operation?

Not all Forex Brokers use the same calculations to establish the necessary margin to keep an operation open – but we could establish a generic rule, which would look like this:

Required Margin = Number of lots * contract size / Leverage.

The number of lots would be the size of our operation (1,2,3 lots) the size of the contract, would be the size of each of those contracts, and the leverage will depend on the contracted-for our account, which in the micro can be up to 1: 888.

First, the margin is calculated in the base currency of the traded pair but then moves to the base currency of our account.

Margin Call

The margin always depends on the currency of our account, so when you open operations in some pairs, the money seems to fly.

What Happens If Someone Can’t Pay a ‘Margin Call?’

The minimum margin is the money that a margin account customer must deposit with a broker. If you have a margin account, you can borrow funds from your broker for purchasing stocks and/or other trading instruments.

As soon as a margin account gets approved (and funded), one can borrow funds up to a specific percentage of the transaction’s purchase. Thanks to the leverage that trading with borrowed money offers, a trader can put more significant positions than he could do with cash normally; hence, ‘trading on margin’ can significantly magnify both losses and wins.

However, understandably, just like in the case of any loan, you are bound to repaying the money your brokerage had lent you.

The brokerage firms that offer contracts and shares typically set the minimum margin requirements. These requirements change accordingly to the factors, for instance, change in volatility, geographical events, and supply and demand of a product. In order to register an account, you need to deposit money; this is called the initial margin. The maintenance margin is the least value that is kept in a margin account.

In case your account falls below the fixed maintenance amount, a margin call will occur. Again, as a reminder for those who still need some explanation is a demand from your account, which asks you to deposit money to your account in order to bring it back to the mandatory level.

Moreover, the margin calls are compulsory to be met. If they aren’t satisfied, the brokerage platform will probably abandon your chances to get your account back to the minimum level. Although, this may not happen with your very own consent — still, the brokerage firm will liquidate accordingly.

Your brokerage platform will charge for every transaction made. Your brokerage firm isn’t responsible for continuous losses during the process, and the brokerage platform will perhaps liquidate shares and contracts to surpass the required margin.

Author : Michael Fasogbon

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Michael Fasogbon is a professional Forex trader and cryptocurrency technical analyst with over five years of trading experience. Years back, he became passionate about blockchain technology and cryptocurrency through his sister and has since been following the market wave.