The term Margin Call (Margin Call) came to the Forex market from the stock market. Literally, it translates as a call due to collateral (margin) issues. When a loss is incurred and the client’s deposit amount reaches the value corresponding to the margin for the open position, the broker would pick up the phone and offer the client to either add money to the deposit or close part of the losing position. Phone calls are a thing of the past, and now on the Forex market, a Margin Call refers to the forced closure of a losing position by the forex broker when the remaining amount on the deposit reaches the Stop Out level, which is expressed as a percentage of the required margin.
When Does a Margin Call Occur?
The concept of Margin Call is closely linked with the concept of leverage. At first glance, everything seems quite complicated, but there is no need to be afraid. Let us explain the process with a simple example.
So, we have:
- deposit $5000
- leverage 1:100, provided by our broker
- total deposit amount is $500,000, of which $5000 still belongs to the trader and $495,000 to the broker
- open trade with a margin of $1000
- in the end, the equity on the account is $5000 – $1000 = $4000
- standard lot on Forex is 100,000 currency units. In our case, $1000 belongs to the trader, and $99,000 are funds from the broker provided under leverage.
Assume that the price moves against the open position, and the loss starts to increase. The trader did not use a Stop Loss, so the loss continues to grow. When will the Margin Call occur? The answer is simple: when the amount on the account becomes equal to or less than the margin amount, in our case $1000. In numbers:
$5000 (initial amount) + $495,000 (leverage) – $4000 (loss) = $496,000 (when closing the account)
Out of these, $495,000 is returned to the broker, and $1,000 remains on the account. As you can see, the Forex broker does not lose anything when their trader incurs a loss, nor do they gain anything except for commission. All risks fall solely on the trader. Note also that there are situations where the amount on the account remains less than calculated. This happens due to sharp market fluctuations. When the Margin Call triggers, the loss is fixed, but in those milliseconds, the price has already moved further away.
P.S. In the trading community, there are also slang expressions such as “pushed out by stop-out” and “Moryov Kolya has come.” These are the same as the activation of a Margin Call.
FAQ
What is a Margin Call?
A Margin Call occurs when your account balance falls below the required margin, prompting the broker to close your positions.
How does a Margin Call work?
A Margin Call is triggered when your account balance drops below the required margin, resulting in the forced closure of your losing positions.
Why is a Margin Call important?
A Margin Call is important because it helps protect the broker from losses and ensures traders manage their risk effectively.
