Lesson 9: Understand Your Broker: What Is a Margin Call

"Receiving margin calls is like stepping on a big stinking pile of p*op!" 

If you've been studying forex trading, that phrase is familiar to you now. For forex traders, getting a margin call is a stinking experience. It means your position is losing, and your capital is at big risk.

When you get a margin call, you can only do three things:

1. Deposit more into your account.
2. Accept defeat and close out your position.
3. Pray that the market will go in your favor.

In this lesson, you’ll learn the nitty-gritty of margin trading and how it can pose a risk to margin calls.

Lesson Highlight

• When a trader’s margin level reaches 100%, it signals that their free margin ran out, and they should expect a margin call from their broker.
• A margin call is a broker’s way of informing traders about their losing margin account. The broker will ask the trader to fund their trading account to provide more cushion to support the open margin positions.

Margin Call 

All traders have a mental note of unfortunate events they experience in the forex market. This includes falling to scam brokers, volatile markets, and getting heart-pounding margin calls.

But what is a margin call?  

Well, it's a notification from your broker that your position is losing money, and you risk losing more money if you don't act.  

The broker will act when they notice your position is continuously losing, putting the equity on the margin call level.

It's when the floating losses consume most of your equity and become equal to or even less than your used margin. A margin call can be a literal phone call, a trading platform account notification, or an email.

Margin Call Level

The margin call is the event where your broker gets in contact with you, right? But do you know what triggers this event? 

The answer is margin call level.

The margin call level is a minimum losing streak pattern (a threshold) your broker sets. The margin call level is within the margin level metric, the ratio of your account equity to your used margin.  

Your broker uses the margin call level to access your position and protect the borrowed funds you use to open the position. Basically, they use a margin call so that your deposit (used margin) won't suffer if you lose when trading with their leverage.  

The margin call will be initiated when the broker sees that your position is at or below the margin call level. 

Margin Level 

Your account's margin level is important as it provides a real-time health assessment and risk exposure for your position.  

It informs your broker whether your account can open additional positions or not. You're most likely eligible to open new positions if you have a high margin level (>150%).

A high margin level simply means you have sufficient free margins to spend. A high free margin would allow you to enter additional trades and give you a comfortable cushion against market reversals. 

How to Calculate Margin Level 

When calculating your margin level, you must know your account equity's and used margin's value.  

Let's review: 

• Used Margin is the sum of all the open positions' required margin. If you only have one open position, your used margin must be the same as your required margin.   
• Account Equity is the current trading account value. If you have no open position, your equity is the same as your account balance. If you have an open position, your equity will increase or decrease as your position rides the market. 

For the formula, you'll get the ratio of equity to used margin. You then multiply it by 100% to get its percentage value. 

To put it into perspective, here's Ester's margin account situation.  

Ester found a broker that gives a leverage of 50:1. To take advantage of it, she decided to open an account and deposit USD 10,000. That would allow her to control up to USD 500,000-worth position.  

She goes long USD/CHF with a notional value of USD 1,000. This position costs her a required margin of USD 2,000 and decreases her free margin to USD 8,000.  

Considering she only has one open position, her current margin level is 500%.  

But what would happen if Ester opened additional positions? Her 500% margin level would decrease in value as Ester added another used margin to the equation.  

Let's look at Ester's situation as she opens another trade. 

Ester noticed that the USD/JPY market is exhibiting patterns of a bullish trend. She decided to open a buy position to take advantage of the market trend. Her position's notional value is USD 200,000, which costs her a USD 4,000 required margin. 

Since she opened another trade, her used margin will increase, changing her account's margin level from 500% to 166%. 

With a 166% margin level, she still has enough cushion for her open positions. However, it will be harder for her to open an additional position unless she deposits more money into her account.  

If Ester's positions experience floating losses, her margin level may drag to 100%. That's because her account equity is nearing the value of her used margin. When this happens, she can expect a margin call from her broker.

Throughout the lesson, you've learned the dark side of margin trading: getting margin calls. But here's the question, "Is margin call the worst thing you experience when trading on margin?" 

In the next lesson, you'll learn how brokers can liquidate or "stop-out" your position if you fail to act on the margin call.

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