A margin call is an important concept in trading, particularly for those who use leveraged accounts such as forex, CFDs, stocks on margin, or indices. Simply put, a margin call occurs when the value of your trading account falls below the minimum required margin set by your broker. When this happens, the broker will request that you either deposit additional funds into your account or close some of your open positions to reduce potential losses. If you fail to meet the margin call, the broker has the right to automatically liquidate your trades to protect itself from further losses.

To understand margin calls better, it helps to know how margin works. Margin is essentially a deposit or collateral that allows you to control a larger position than your actual capital. The leverage ratio determines how much you can control; for example, a 10:1 leverage means you can control a $10,000 position with $1,000 of your own money.

The margin call is triggered when your account equity falls below the maintenance margin requirement, which is the minimum amount of equity the broker requires to keep your positions open. The equity in your account can be calculated as:

Formula: Equity = Account Balance + Floating Profits – Floating Losses

If the equity falls below the maintenance margin, the broker issues a margin call.

For example, imagine you have an account balance of $5,000 and you open a forex position worth $50,000 with 10:1 leverage. Your initial margin is $5,000 (which you provide), but if the market moves against you and your floating loss reaches $1,500, your equity is now $3,500. If your broker’s maintenance margin requirement is 30% of the position size ($15,000), then your equity ($3,500) is well below that threshold, triggering a margin call. The broker will ask you to add funds or reduce your position size. If you don’t, the broker can close your losing trades automatically to prevent further losses.

A real-life example involves the 2015 Swiss Franc shock, where many forex traders faced unexpected margin calls. When the Swiss National Bank removed the Franc’s peg to the Euro, the Swiss Franc surged dramatically. Traders holding leveraged positions against the Franc suddenly saw their account equity plummet, triggering margin calls. Many brokers automatically closed positions to limit losses, resulting in significant realized losses for traders who were unprepared for such volatility.

Common mistakes related to margin calls include misunderstanding the leverage used, not monitoring floating losses, and ignoring margin requirements. Some traders believe that margin calls mean they are out of money immediately, but in reality, it is a warning to act. Others think that brokers cannot close trades without permission, but most brokers have the right to do so under the terms of their agreement to protect both parties.

Related queries often include: “How to avoid a margin call?”, “What happens during a margin call?”, and “Difference between margin call and stop out.” To avoid margin calls, traders should use proper risk management, including setting stop-loss orders, monitoring their margin levels regularly, and avoiding excessive leverage. Knowing the difference between a margin call (a warning to add funds or close positions) and a stop out (the broker automatically closes positions when margin is too low) is also crucial.

In summary, a margin call is a critical risk management tool in leveraged trading. It signals that your account equity has fallen below the required level, and immediate action is needed. Understanding how margin calls work, staying vigilant about your account balance, and managing leverage responsibly can help you avoid forced liquidations and protect your trading capital.