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What is a Forex margin call, and why should you avoid it?

Forex Market Expert Paul Holmes shares his knowledge of Forex trading ahead of Women of the Square Mile, 15th May 2019. 

Forex Trading

Despite societal perceptions, women tend to outnumber men in jobs that require a high-level of numerical skills. This includes Financial Clerks, Accountants, Auditors, Business Operations Specialists, Finance Specialists and Budget Analysts. For this reason, an increasing number of women have the expertise to enjoy trading. Moreover, research shows that women favour Forex trading above other trading styles, with 42% classifying themselves as experienced Forex traders. 

For all the female Forex traders out there, here's a deep dive into Forex margin calls and how to avoid them from Paul Holmes, Forex Market Expert.

What is a Forex margin call?

A standard definition of the concept of margin, in relation to retail Forex trading, is: the amount of money you need in your FX trading account in order for your broker to allow you to open (or keep open), the trading position (or positions) you have in the market/on your account.

If you don’t have enough cash in your account relating to your positions, then you’ll receive a margin call, asking you to top up your account immediately. If you don’t honour this request, then you could find your trades closed and your ability to trade through your account and on your platform restricted. Until the margin is restored to the acceptable levels required by your broker, or the financial authority governing your chosen broker’s activity.

If you open an account with €10,000 and have no trades live, then technically you have €10,000 of USABLE margin. Your usable margin is equal to equity, minus the used margin. Your margin is determined by your equity and not your account balance. Therefore, your remaining equity will determine if you receive a margin call and, if your equity is greater than your unused margin, you won’t receive a margin call.

The second your equity falls to the level of your margin or below it, you will receive a margin call and your trading could be restricted. Margin is therefore classed as the amount of account balance you require in order to hold the trade or trades open, whilst leverage is the multiple of exposure versus account equity.

Here’s an example to explain how margin works, in relation to live trading situations and how a margin call might occur:

If a trader has an account with a value of €10,000 in it and they want to buy 1 lot (a £100,000 contract) of EUR/GBP, they would need to put up £850 of margin in an account, leaving £9,150 in usable margin (or free margin). This is based on one euro buying approximately 0.85 of a single unit of pound sterling. You must also note what margin requirements your broker has. Your broker always needs to ensure that the trade (or trades) you as a trader have in the market place, are covered by the balance/equity in the account. Margin is often regarded as a safety net and circuit breaker, for both traders and brokers. It can help prevent traders from burning through their account too quickly, with poor decision making.

Traders should always constantly monitor the level of margin (balance/equity) in their account at all times, as they may be in profitable trades, or convinced that the position they are in will eventually become profitable, but suddenly find that their trade or trades are closed, if their Forex margin requirement is reached or breached.

If the margin drops below the required levels, this is when your broker may initiate what is known as a "margin call". In this scenario, the broker will either advise the trader to deposit additional funds into their Forex account, or close out some (or all) of the positions, in order to limit the loss, for both the trader and the broker.

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