Lesson 15: How to Avoid a Margin Call?

Margin trading is one of the most common ways for retail forex traders to earn profits. However, if you trade on margin without a solid understanding of the concept, you may find yourself facing a margin call sooner than you like. 

But you don’t need to worry! 

In this lesson, you’ll learn five techniques you can use to help avoid margin calls when trading. 

Lesson Highlights 

• Pending orders can result in accidental margin calls if you fail to monitor your margin levels and other margin requirements before placing them. 
• Using stop-loss orders and trailing stops can help you avoid margin calls. 
• Scaling in can be a better alternative to opening huge positions to avoid margin calls. 

Be Aware of Margin Calls 

The first—and perhaps most important—way for you to avoid margin calls is to be aware of what it is. 

Less experienced traders often focus on the more “profit-centric” aspects of forex trading, such as technical indicators and chart patterns. 

Learning these concepts is all well and good; however, you also need to pay close attention to the factors that directly concern your trading account (e.g., margin requirements, equity, and margin levels.) 

As you’ve learned from previous lessons, these facets directly contribute to whether you’ll receive a margin call. Familiarizing yourself with the concept of margin calls will strengthen your understanding of margin requirements, margin levels, and the like. 

Armed with this knowledge, you can closely monitor these factors and assess the overall health of your trading account, which is crucial to determining how close you are to a margin call. 

Know the Margin Requirements Beforehand Before Placing Orders 

Another way to prevent unexpected margin calls is to consider the margin requirements before placing orders, especially pending ones. 

Pending orders are singled out here as these types of orders are not affected by margin requirements upon placement. However, once filled, these orders can result in margin calls if you fail to monitor your margin level properly. 

Use Stop-Loss Orders or Trailing Stops 

As the term implies, stop-loss orders are pending orders you send to your broker. These orders are among the best ways to keep your capital safe while trading. 

Stop-loss orders are fail-safes that are triggered when the market moves against your position and reaches a predetermined level. 

For instance, suppose you have a long position of one mini lot on the EUR/USD at 1.3501 and set your stop-loss order at 1.2501. If the EUR/USD price drops to 1.2501, your stop-loss order will kick in and close your long position at a loss of 100 pips, or USD 100. 

Neglecting to use a stop-loss order can result in losses exceeding USD 100, which can result in a margin call depending on your open positions and market movement. 

Don’t Go All In—Scale 

Another mistake that can land your trading account in margin call territory is going all in when prices seem to be moving in your favor. 

Imagine you’re trading the GBP/USD and see its price rise higher than expected, and it’s still climbing. You’re certain it’s nearing the price’s resistance level and is bound to reverse soon. Anticipating this reversal, you open a large short position in the pair. 

If the price does not reverse as you predicted, you will incur a massive loss that can bring your equity down to margin call levels. 

The more prudent move will be what experienced traders call “scaling in.” With this approach, you’ll slowly build your short position one mini lot at a time instead of four at once. 

This way, you’re slowly building or scaling in one pip at a time as the market moves in your favor. You can also move your stop-losses in tandem with your new positions to mitigate possible losses. 

This tactic requires you to deposit more capital as the margin requirement increases. However, scaling in drastically reduces the chances of a margin call as you’ve spread out your positions. 

Prioritize Risk Management 

Risk management is as important in trading as making profits, perhaps even more so. Many inexperienced traders enter the forex markets thinking only of earning profits, to the detriment of developing risk mitigation strategies. 

While risks are inherent in every trade, you can always develop management tactics. By doing so, you’re distancing yourself from margin calls and easily avoidable upsets. 

Prioritizing risk management strategies over profit-making tactics can contribute to a steadier revenue stream as you reduce the losses you incur.

In the next lesson, you’ll be getting more tips on things you must avoid when you’re trading.