When you invest in Forex, a whole new world of terminology presents itself. This article explains one of the most disturbing events that can happen in your Forex experience. Let us assume that you have invested in a Forex pair, and things are not going well. Your investment is losing money, but that little voice in your head keeps telling you that things will change. If you do not act soon, your broker will step in.
What happens when you get a margin call in forex?
Before we can discuss forex margin calls, we need to make sure that the terminology is fully understood. When you open an account with a broker, you have to deposit some money into the account. The deposited money offers a broker a gesture of good faith that you have the money to satisfy your trading habits. Your profits will be added to this account and your losses will be taken out of the fund.
- What is equity? Equity is the amount of money that you have in your account. Equity includes your original investment, any top-ups that you have done to your account, your profits added, and your losses subtracted. The amount that is left represents your equity.
- What is leverage? Leverage is essentially a loan. When you open your account with, let’s say, $10,000. Your broker (the kind man that he is!) will allow you to trade with more money than you have in your account. How much the broker will extend for your use is variable and depends on your broker, the amount in your account, and possibly your trading history. The benefit of using this loan is that your profits will be more. The more you invest, the more your profits will accrue. Unfortunately, leverage can work against you, and you can find yourself in massive financial overload if your trading results in a loss. Just as your profits will be greater (Nice!), your losses will also be more, possibly more than you can afford.
- What is a forex margin? When trading in Forex pairs, you do not have to have the entire load of money you want to invest. Your broker will give you leverage. Your broker will decide how much leverage you can have. The amount that you contribute to the transaction is called a margin. The broker uses your margin to keep the transaction open until either you or he closes it. Margin requirements are a percentage of the desired trade. A margin is not a set percentage. The broker will decide on the percentage he will use, dependent on the forex pairs you want to trade.
- What is a margin call? A margin call is sad, unwanted, and unrequested. A margin call definition: You have reached the end of the money required to back up your transactions, and your broker contacts you to sort it out. In other words, your Forex margin is exhausted, and your broker calls you to sort it out. That call used to be by phone, but most brokers use WhatsApp. Some will inform you via e-mail or SMS. The margin call should not surprise you, as you should have been keeping an eye on your investments. However, things can change in seconds. You get up to get that cup of coffee, and BOOM! Your investment has spiraled down. You will sit on tenterhooks until the situation improves, or you get that dreaded margin call.
Brokers use a formula to decide whether or not to make that margin call. If your equity is more than your investment from your account, you are safe. There is still money in your account to keep your trades open.
What is a margin call? If the equity and the used margin are equal, your broker will act. The broker will ask you to rectify the situation. You can do this by either investing more cash or by closing the nasty, losing investments. You do not want the situation to deteriorate so that the money you have used is more than your equity. Remember, you are trading with leverage, so your losses become so large that you may not be able to recover. To rectify the situation, you will probably have to close all open trading.
How long do you have to pay a margin call?
The length of time a broker gives a client is dependent on that broker, but it will usually be between two and five days.
During that time you will either have to transfer more money into your account with the broker or terminate some of your investments.
When you invest in a Forex pair, you draw on some of your funds in your account, and the broker gives you leverage so that you can make a sturdier investment. You can carry on buying lots in the same or different Forex pairs. When you get a margin call you have a few days to add more money to your account. If money is in short supply or you do not have funds immediately available (for example, all your money is tied up in a notice account – an account that requires you to request the cash weeks or months in advance,) you need to take some other action.
The other action is to decide which investments you will close. You should start with the one that is causing the trouble.
If you fiddle around in confusion until the allotted time is up, then the broker takes charge. The first action he will take will be to prevent you from trading anymore. He will close or liquidate your account. The broker reserves the right to do this. He does not have to inform you. He can then close any or all of your open transactions until your account is back in the black. He will first close the Forex pair that is mainly responsible for the margin call. If that doesn’t sort the problem out, he will continue to close accounts, starting with the one that has the smallest profit until you have a healthy margin.
What is a margin call? Your broker has issued a call for action on your part before he takes matters into his own hands.
Remember your broker does not have to inform you. You may lose some potentially good accounts. You may lose everything and battle to pay the broker his commission on the transactions.
One of the best ways to sidestep a margin call would be to employ stop-loss orders. Most investors do not like stop-loss orders because a computer will decide when to abandon an investment. If you are in any way lackadaisical with your investment a stop-loss order will minimize the necessity for a margin call.
What is the purpose of margin call in Forex?
What is a margin call? Let us look at the definition margin call. You have been playing Forex pairs with some of your money and some of the broker’s money. The broker starts to get nervous when he sees that your investment is eating up his money and yours. He is not too concerned about your money, but he is very concerned about his. Before the situation gets out of hand, your broker will send you a margin call. He is saying, “Whoa! Let’s get out of here FAST! You are losing this Forex battle of pairs.”
So what is a margin call? It is an escape route to get out of financial trouble.
Forex pairs are unstable. Anything can upset the ratio between them. You probably do not have time to sit at your computer all day. That is the job of your Forex broker. His sole purpose is to keep an eye on his client’s portfolios and watch the market trends, the state of the two countries, and any natural disasters that may affect the performance of the pair. Your Forex broker wants you to win because when you are winning, so is he.
Small dips in your investment do not have to be worried about because there is always tomorrow when the currency may become stronger. What will concern the broker is when the performance of the pair continues to dip. He will then examine all his clients who are trading with that Forex pair. Some will be trading with a good margin, but for others, the margin is closing. It is getting smaller and approaching a point where your money will not cover the deficit percent that the broker requires.
The broker looks at three things.
- What is your equity? Equity is the amount you have sitting in your account, but some of it has been used to sustain your selected Forex pair or Forex pairs.
- How much of your margin has been used? If the amount you have used is close to the amount you have in equity, you will be heading for trouble.
- What margin do you have that is available for trading? Subtracting the money you have used from your equity gives the broker the figure that you can still invest. If that figure is approaching zero, you will get a margin call.
What is a margin call? The purpose of a margin call in Forex is to make sure that you don’t lose everything and bring your broker down with you. Fast action is required. He will want to see an act of faith by you. You need to deposit more cash into the account, or you must instruct him to get rid of the pair that is causing the dip. You will have a few days to do this before he steps in to save your neck and his.
How do I stop margin call in forex?
The margin call meaning is to help you and your broker. It is to help you both cut your losses before it becomes irreparable.
You can avoid a margin call:
- Use your leverage wisely. Do not borrow more than you can handle financially or emotionally.
- If you cannot keep a very close eye on your investments, you need to put a stop-loss order in place. This will close your transaction before it becomes critical.
- Make sure that there is always free money in your account to weather the storms that Forex pairs may experience.
- Get rid of pairs that are not doing well. Never become so attached to a pair that you convince yourself they are going to bounce back.
With these four things in place, you should never receive a margin call.
Bear in mind the answer to the question what is a margin call? If all the above fails and you do somehow get a margin call, deal with it quickly. Do not leave it to your broker. Your broker will not give attention to your personal feelings. He will first close off the worst-performing pair. If that doesn’t sort the issue, the next worst performing pair will disappear and so on until maybe he has closed your account completely.
Once you have left him to do everything, you will have to pay for it. He has to make a living, and you know you need to pay for services rendered. If your account has been closed, it can be very time-consuming to get your account up and running again, and your broker may feel that you are not financially mature to operate with him. So you may end up back in a demo account or searching for a new broker.
Prevention vs Cure: Prevention means operate your account wisely. Cure means get rid of everything that is underperforming before you sink.
What is a margin call? It is a call to action.
So back to the question asked in this section – How do I stop a margin call in Forex?
- Be responsible
- Keep an eye on your investments
- Get out before a margin call forces you out
- Act quickly if you get a margin call
- Use stop-loss even if you do not like a computer to think for you.
This last point is probably the best advice for you if you have restricted time to look after your investments.