Margin and Margin Call

Margin and Margin Call

While Forex brokers allow traders to trade money ten times more than what's been actually invested, brokers always know that traders never lose money beyond their real investments. The warranty here is Margin.

Margin in Forex identifies a requirement for the trading account to have certain amount of real funds on balance as a collateral to cover any possible losses.
In other words, a margin prevents traders from losing virtual money (the money they don't have).

Margin makes sure that while having trading positions open, traders have just enough real money on balance to cover losses if they are to occur.
Margin requirements vary from broker to broker. Most Forex brokers require 0.5% to 10% margin depending on the leverage chosen.
Example: Leverage — Margin table


So, at 20:1 leverage a trader required to have 5% of the value of each open position in the account intact. This equals to $500 on hold per each lot of 10 000 units. ($10 000 * 5% = $500)

Available margin, Free margin, Usable margin — all are the synonyms used by different Forex brokers — regulate the allowance for your trading appetite:
A trader can not open trading positions which exceed Available margin; and/or keep old positions running if Available margin is drained out = equals 0.

In case a trader uses the entire Available margin he will get a Margin call.

Available margin = 0
Maintenance margin, Required margin, Used margin — also are synonyms, which suggest funds that are in use, currently locked in order to "maintain" currently open trades.
In other words, Margin call occur when due to losses trader's Account Equity (balance + the total of all floating profit/losses) becomes equal to Used margin value and/or slips slightly beyond it.

Account Equity <= Used Margin
Margin call simply means that all or a certain part of open trades will be closed in order to prevent further losses beyond account balance.
No trader ever wants to receive a margin call and have running trades closed despite his/her will.

That's why traders try monitoring their account parameters as they trade.
When Margin call situation seems to be inevitable, a trader may try to prevent it by either adding more funds to the account, or closing few losing trades at own choice, or change account leverage to a higher one (with higher leverage Margin requirements will be lowered).

Now, remember, we said earlier that the higher the leverage, the lower the margin. And the lower the margin, the less money is required to keep open trades running safe.

Let's look at the next trading conditions offered by Forex broker:


If a trader takes the highest leverage of 200:1 the margin is going to be only 0.5%. As a smart trader with sound knowledge of money management principles he will never trader inadequately large lots, thus leverage won't hurt him, but he will benefit from lower margin requirement by dropping yet another worry of getting a margin call.

That's it. Now you know how to deal with leverage and margin in Forex:
Take any leverage at your choice and taste, but don't overuse your leverage powers, instead trade lots sizes which in your opinion are appropriate for your account size and your own risk tolerance.

Take advantage of a lower margin by increasing your leverage.
There is final but very important fact every trader should memorize:
If you are ever going to step away from the charts and leave trades open without placing protective stops, take the lowest leverage possible or don't take any at all.

Without a stop order in place the risks of losing entire account balance or its large part increase dramatically. Consequences of some large economic events may shift prices in Forex market by 500 pips and more in fairly short period of time. Chances are, your account won't be prepared to sustain such shifts and money will be lost. Then the only hope to save some capital comes from nowhere but a margin call...
That is why trading without stops in Forex means being not serious about long prospective of own investment.