A Simple Explanation to The Margin Call in The Forex Market

A forex broker will close your open position(s) immediately if the equity in your trading account drops below the margin requirement. This to prevent you from negative account balances.

For example:

Assume you have a trading account with $20,000 and margin requirement is set to 100:1. Without any open positions, your usable margin is $20,000.

Getting a margin call scenario:

You use $15,000 to buy 15 lots of EUR/USD, you now have $5,000 of usable margin left. This means that you are allowed to lose $5,000 on the open postion before you are under the margin requirement.

Formula: Usable Margin = Equity – Used Margin

In the event EUR/USD moves in the opposite direction of what you believed would happen and you don't close your position to prevent you from further losses, the broker will automatically close it when your usable margin is $0.

You would have lost $5,000 on this trade and the EUR/USD only moved 33 pips against you.($5,000 usable margin /(15 lots x $10/pip))!

Conclusion

Leverage is a double-edge sword and can lead to large losses as well as gains, trading big leverage can be fun because it dramatically increases your buying power BUT in the event a trade moves in the opposite direction of what you believed would happen, it can cost you a lot money. Use risk management tools such as limit, and stop-loss orders to prevent you from getting margin calls.

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