The Margin Call

What is the margin call?

margin call is the requirement by the broker or dealer for the trader to add new funds to meet the requirements of margin required to cover their open positions in the market.

The margin call is a situation that occurs in markets in which the traders invest with margin, ie, in those in which leverage is used (Forex is the best example of those markets). The margin call occurs when the free margin in the account falls below the minimum margin required by the broker to cover the positions the trader has opened. When the margin call occurs, the investor has to increase the margin in the account, which can be done by adding new funds or by closing existing positions. If the trader does not increase the margin in the account, the broker can close positions of the trader, whether the positions at a profit or a loss. Usually, it's the system itself of the broker that make the margin call automatically when the free margin falls below margin requirements. Thus, the broker prevents clients lose more money than they have deposited in the account.

Failure to meet margin requirements are generally produced by strong market moves against the trader's positions and in many cases by poor use of money management strategies. The higher leverage used in the positions, the smaller the market movement against the positions that needed to produce a margin call.

Example of a margin call

Suppose we have an account with $10,000. The margin required by the broker to open a position with 1 lot in the EUR/USD is $1000 (leverage of 1:100).

If we open a position of 1 lot, the free margin will descend to 9000 dollars. Imagine that instead of one lot, we open a position with a volume of 8 lots, so the free margin would lower to $2000. If each movement of 1 pip is worth $80, by the time the EUR/USD pair moves 25 pips against us, our margin is gone.

Although in theory, we have $10000 of capital, and we are losing only $2000, we have no margin to continue responding to a scenario, in which the pair continues to move downward. At that time, the broker will make a Margin call, despite we continue to have money in the account.

How to solve a margin call?

For this there are only two options:
  • We put more money immediately into the account, and this should be with a credit card or an online payment system like Skrill, to be very fast
  • We reduce the position size. 
As you can see, when we open a position, we must have thought of all the possible scenarios, and take into consideration the available capital in our account.