Avoiding a Forex Margin Call

Avoiding a Forex Margin Call

While trading currencies, you may have heard the term “margin call” being uttered ominously throughout forex blogs and forums. Although the wording sounds confusing, it actually occurs whenever an account is incapable of sustaining open positions. In reality, you should try to avoid getting margin called as much as possible, and getting to know the various ways that you can do so is absolutely crucial for long-term success. Rather than learning from experience, it’s always the better option to avoid a margin call right from the outset.

margin call

Know Your Margin Requirements

Getting to know how a margin call occurs is the first step to avoid it. In short, whenever you open a live position with your forex account, your broker requires a margin deposit. Any margin left over fluctuates due to unrealized gains and losses, and if your trade goes bad, it eats up your usable margin until you don’t have any left. At this point, you get a margin call and all positions are closed automatically. Since the amount of used margin varies depending on the currency pair and leverage used, it’s always best to talk to your broker on the margin requirements beforehand.

Don’t Over-Leverage

The biggest reason margin calls occur is due to large lot sizes that simply don’t leave any room to account for drawdowns. With high leverage, multiple large positions combined can put a real dent in your usable margin column. It’s generally good to have a pre-determined level of exposure and prevent opening additional positions once you reach that limit. Preferably, you should only risk a maximum of five percent of your account margin at any given time.

Avoid Volatile News

Volatile news releases such as the U.S. Non-Farm Payrolls report almost always result in extremely rapid price movements. Combine that with leveraged positions, and you have a recipe for disaster. Most traders new to forex almost always get margin called due to unanticipated news releases, and it’s absolutely crucial that you stay in the loop to prevent that from happening. There are numerous sites dedicated to keeping tabs on the latest macroeconomic news reports, so consider subscribing to one to stop any unwanted surprises.

Release Used Margin

Most forex brokers almost always provide some sort of warning in advance before you receive a margin call, and you can use this to your advantage to close open positions and preserve your usable margin. Better yet, closing positions also release any used margin back into the usable pool, thereby allowing any remaining positions more breathing room, and ultimately, delaying potential margin calls. If you are confident that certain positions can get back into profit, it’s always better to utilize this strategy.margin call

Deposit Funds

In addition to closing positions as a means to increase available margin, you can also consider depositing fresh funds to boost your balance. While it isn’t recommended from a money management perspective, consider depositing funds only if you absolutely want to avoid a margin call. In case you want to use this as a backup strategy, ensure that your broker facilitates deposits without any holding period whatsoever so that funds appear in your account instantly.

Wrapping Things Up

An effective trading strategy that incorporates the techniques mentioned above can go a long way towards preventing a margin call. Keeping up-to-date on margin requirements, avoiding volatile news releases, preventing over-leveraged position sizes, and freeing up used margin can contribute immensely to preserving your capital. Consider adding funds as a last resort, and make maximum use of your money management techniques to ensure that you never have to risk getting margin called.

*Please Note, Forex and other forms of trading carry a high level of risk to your capital as you could lose all of your investment. These products may not be suitable for every investor, therefore ensure you understand the risks and seek independent advice. Invest only what you can afford to lose. We are NOT financial advisers and we do NOT offer financial advice.