Your broker automatically sends a margin call when your free margin reaches $0 and your margin level reaches 100%. From now on, it will be impossible to open new positions.
Thanks to leverage, traders gain leverage that allows them to open positions that are several times larger than the size of their trading account. This helps to win much more, but the losses are also growing. It is at such times, when you hold too large a position and the market is going against you, that you can get a margin call. This will trigger the automatic closing of all stop-out positions if the market continues to move against you.
An example of a margin call.
You open a $4000 Forex trading deposit and use 1:100 leverage. As we know, the lot size in forex is equal to 100,000 units of the base currency ($100,000). Using the 1:100 leverage, you need to deposit $1000 of your money as collateral for each open trade in the amount of one lot.
After analyzing the currency pair EUR/USD , you decide that the price will go up. Open a long position for two standard lots in EUR / USD . This means you are using $2,000 of their funds as collateral. At the same time, the free margin will also be $2000. The cost of one item when exchanging one lot of software will be equal to $10. This means that if the price falls by 200 points, the free margin will reach $0, the level Equity will be equal to the used margin and you will get a margin call.
How can margin calls be avoided?
To avoid margin calls, you must follow the risk management rules. Before opening positions, you need to know where your stop loss will be and how much it will be worth as a percentage of equity. The distance from your entry point to your stop loss should determine your position size and consequently your risk level. Do not do the opposite: the size of your position should not determine the size of the stop loss.
You may have heard that it is not worth risking more than 5% of capital in a transaction. Trading according to this rule is, of course, better than trading without rules, but an experienced trader will still say that it is too dangerous to risk 5%. Using the 5% rule, you can lose 20% of your capital in just 4 trades, which is too much.
The more money you lose, the more difficult it is for you to return to the previous level of your trading capital. Serious drawdowns are also psychologically difficult for most novice traders. You may even start trading wanting to recover and start opening even bigger positions to try to recover. their losses. But this will no longer be a trade, but a game of chance.
Never risk more than 2% of your trading account on any one trade. If you are just starting to trade Forex, 1% risk will be even more appropriate. Once you feel confident in yourself and your trading strategy, you can slightly increase your position size. In any case, 5% is too much for most trading strategies. Even the best traders can make 4 or 5 losing trades in a row.
If you want to trade large lots, you need to have the right amount of capital. This is the only safe way to trade for large amounts.
The number of positions you open at the same time determines your risk at any given time. If you risk only 2% of your trading account on one trade, don’t think you can open 10 positions at once; this is a sure way to get a margin call.
Even if you only open two positions, but you are trading correlated currencies, you are still risking 2% on a trade. An example of this might be a 1% risk on a long position in EURUSD and a 1% concurrent risk on a long position at GBPUSD . If there is a sharp jump in the market due to the US dollar, you will take a loss on two positions and lose 2%.
Therefore, try not to open multiple positions in correlated currency pairs, or at least be aware of the possible risks.
Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I’ll be happy