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Have you ever received the dreaded forex margin call? But contrary to the popular opinion that a margin call represents that worst case scenario for the currency trader, this is far from the truth. The risk that is assumed when trading aggressively the currency markets often results in receiving a margin call. The worst case could be far worse. To owe additional funds to the broker is actually the worse case scenario. A margin call is in fact a safeguard to protect a trader from losing 100% or even more of the money in the trading account. This uncomfortable position is largely avoided because of the existence of the margin call.
In stock trading, you will receive an actual call from the broker to add more funds to your margin account when equity is running low. Unlike the world of stock trading, a margin call is not actually a physical call from your broker in forex trading. The trading platform software automatically closes out all the open positions and immediately realizes all losses at the prevailing market rates when a forex trader no longer has enough equity in the trading account to keep the open positions viable in forex trading. You might be thinking cold hearted behavior of your forex broker.
There are good reasons for automated margin calls in forex trading, although this may seem a bit cold hearted. Prices can move extremely fast in forex markets and because of the high leverage used, every price move is magnified. The trading account can become depleted very quickly with not enough time to call for more funds when the traders equity runs low in forex trading. The forex margin call closes all open positions to help ensure that the trader does not lose the entire account or worse as a safeguard measure.
Lets make it clear with an example. Suppose you have $1500 in your trading account. So exactly when is a margin call triggered? This depends exactly on the number and the size of the lots being traded, the leverage chosen and the equity in the account. Suppose you use a leverage of 100:1 to trade in standard lots of $100,000. You want to trade one standard lot of EUR/USD. That is EUR 100,000. Suppose the EUR/USD exchange rate is 1.3465. You need to convert it into Euros since your account is in US Dollars. So you need $1346 to trade standard lot EUR 100,000. This is because with a leverage of 100:1, EUR 1000 are needed to control EUR 100,000.
Each pip is exactly equal to $10 in this case. Suppose you are very new and dont know about stop losses, you start trading without putting stop losses in place. Your trading account has $1500. The margin required to keep the trade open is $1346. When your equity drops below $1346, you will receive a margin call. You have $1500 equity in your trading account. Your open position will be automatically closed when you receive a margin call. That means once you lose the excess equity in your account above the margin required to trade a standard lot that is $1500-$1346= $154. This is equal to 15.4 pips loss (assuming no spread).
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