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Trading Forex- Understanding a Margin Call
March 10th, 2010 | 
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Trading Forex- Understanding A Margin Call.
Naturally when you first start trading you don’t like to focus on margin calls. We all hope we will never have one.
However it is good to understand what they are and when your broker will take that action.
First what is a margin call? Let’s assume you are trading 1 standard Lot with USD as the base currency and your account is $1000 USD. You have arranged with the broker a 100:1 borrowing (leverage).
This means you need as a minimum your $1000 as your margin. Once you have opened your trade and as it is trading the currencies spike against you and all of a sudden your margin is showing as $50 or less, at this point the broker will either contact you or make the call to close the trade. This limits his risk because you have deposited $1000 and your losses of $950 are covered. It can also be beneficial to you because if you are letting your losses run too long hoping it will turn around you could lose a lot of money, which you might not have.
The best way to approach this is to talk to the broker first so you know what their policies are.
If you are a day trader this next tip will not affect you. I am talking about when you leave a trade open over night. Forex as we know is global and depending on where you live the official end of day could be at an odd time for you. The forex market officially ends its business day 21h59 (London time).
What happens is simple any trade that is open is automatically “rolled over”. That way the trade is not closed and there is never any actual delivery of the currency. Most brokers will do this automatically and it will just keep happening. The point to note is the brokers will charge you interest if there is any differential between the interest rates of the country.
Example:
If you are trading EUR:GBP and Europe has an interest rate of 4% and England has an interest rate of 2% the differential is 2% . (these figures are for illustrative purposes only)
It works both ways, sometimes you gain the difference and other times you are charged it.
Example. If you bought the currency with the high interest rate, you gain; if you sold the currency with the higher interest rate then you are charged the difference.
I hope this helps, although with the open trades over night the broker will work all this out for you.
Lyndsay Wilkinson
http://www.articlesbase.com/currency-trading-articles/trading-forex-understanding-a-margin-call-741043.html
Posted in live forex trading
Can you explain margin windows and magin calls to me for forex trading?
Hi,
I’m new to Forex and just started working my way through babypips but I have a question that I can’t seem to find an answer to.
According to ibfx (not sure if url link is permissible here), margin level is defined as:
margin level = current equity in the account / current amount of margin in use
I’ve heard that brokers will make margin calls when margin levels are at 50%, sometimes 80%. I do not understand why this is the case.
I would think that as long as the equity in the account is equal to or greater than the amount required to open the position that the trade could be sustained.
I can see a margin call if a fluctuation of one pip would bring the equity below this amount but I do not see how a 50% margin affects this.
If someone could provide some example numbers perhaps it would help clear this one up for me.
Thanks,
Fortexwindo
I don’t trade currency, but here is how that margin requirement works:
1) You have $12k in the account.
2) You make a $20k investment:
$12k your money + $8k margin
margin % = $8k/$20k = 40%
3) investment drops to $10k
$2k your money + $8k margin
margin % = $8k/$10k = 80%
Now you are only risking $2k of your money and $8k of your brokers. This means they are taking more risk than you are, so that is why they don’t like it. They are that much closer to losing the money that you borrowed from them.
At 10% margin, the investment must lose 90% before the broker loses money. At 90% margin, the investment must lose 10% before the broker loses money.
Taken to the extreme, 99% margin means that your broker has $99 at risk for each $1 that you put up, yet the equity still covers them. Would you lend money at that risk? Some stupid greedy bankers did and got burned when people put zero down on houses and walked away when the house prices dropped.
References :
Good answer there.
IF you want to get in depth with Forex Trading though, you might want to go with the nation’s #1 resource, http://www.squidoo.com/Trading_Forex/. It’s packed with a lot of stuff, so plan to take a lot of time going over the information, and you probably will have to purchase a course to really get deep into it, but the #1 courses are listed there as well. take care.
References :