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What Is Margin Call ?
Margin call trading is a term used in the world of forex trading to describe an alert that is sent directly to traders to inform them that the capital in the account has fallen below the minimum amount needed to keep the position open. A call on margin signifies that the trader or trader should set up additional funds in the account, or close the position to reduce the required maintenance margin. In addition, margin calls are used as a depiction of the trader's account status. When you trade with leveraged products such as CFDs, there are 2 types of margin, namely deposit margin (used to open positions), and the second is maintenance margin (used to keep positions open). Failure to enforce the latter is what will trigger a margin call.
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If the trade starts losing money, then the funds in the trader's account may not be enough to keep the position open and the trader provider will usually ask to replenish the account so that the balance is at the minimum margin. If the trader replenishes their funds, then the position will remain open. On the other hand, if there is no replenishment of the balance, then the trader's provider can close the position and the incurred losses will be realized. The term margin call was first used by the practice of brokers who call their clients to inform them of information regarding account deficits. Currently most margin calls are sent via email.
How to Prevent Margin Calls
To avoid margin calls, of course, you must understand as a whole what things can bring margin calls and what steps you can take to minimize the risk of margin selling. Equity requirements are subject to change at any time during periods of extreme market volatility. Therefore, it is important that you as a trader are vigilant at all times by constantly monitoring the equity level in your margin account. Here we share some tips that you need to do in preventing margin calls:
Prepare for volatility
Leave enough cash or funds in your account that function in protecting the account from a sudden decline in the value of the loan collateral.
Set personal trigger points
Set up additional sources of liquid funds if you need additional money or securities to your margin account.
Monitor accounts daily
Consider setting up alerts that can notify you when the value of your stock drops.
Take advantage of brokers
Apply this method to help you calculate the impact of margin requirements due to trading activity or due to fluctuations in the price of securities in your account.
Trade small
To minimize margin calls, you should of course trade low and approach each trade as just one of a thousand unimportant low trades.
Invest in assets with high return potential
With high-return assets, it can help investors to get enough returns in a short period of time. Buying short-term assets with high potential returns can also help investors to pay off loans with margin interest and still make a profit.
Make regular payments
Interest charges are applied to the investor's account on a monthly basis. Since margin loans do not come with a specific repayment schedule, investors should formulate a clear plan to pay interest charges regularly when due. Making regular interest payments every month will help avoid accumulating loans and keep the loan balance under control.
Borrow less than the allowed limit
Just because an investor has access to more capital doesn't mean he or she should waste it by investing in every stock in the market. The best thing an individual can do is invest a small amount first. Over time, he was able to build his confidence and acquire enough skills to invest in riskier but more profitable stocks.
How to Calculate Forex Call Margin
Information:
- The initial purchase price is the purchase price of the security;
- Initial margin is the minimum amount, expressed as a percentage, that investors must pay for security; and
- Maintenance margin is the amount of equity, expressed as a percentage, that must be maintained in a margin account.
Example of a Margin Call
An investor wants to buy a security for $100 with an initial margin of 50% (meaning the investor uses $50 of his money to buy the securities and borrows the remaining $50 from the broker). In addition, the maintenance margin is 25%. At what price will the investor receive a margin call? Investors will receive a margin call if the price of the security drops below $66.67.
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