What is margin call level in forex?
The margin call level in forex is a critical threshold that, when reached, triggers a margin call from the broker. A margin call is a request for additional funds to be deposited into the trading account because the account's equity has fallen below a specified percentage of the used margin. This is done to ensure that the trader has enough funds to cover potential losses.
The margin call level is typically expressed as a percentage and is calculated using the following formula:
Margin Call Level\=EquityUsed Margin×100Margin Call Level=Used MarginEquity×100
Here:
Equity: The current account balance plus or minus any unrealized profits or losses from open positions.
Used Margin: The amount of money reserved by the broker to maintain open positions.
The margin call level is set by the broker and is usually around 100% or slightly above. When the margin call level is reached or breached, it means that the trader's equity is no longer sufficient to cover the used margin, and there is an increased risk of the account falling into a negative balance.
Here's what typically happens during a margin call:
Notification: The broker notifies the trader that their account has reached or fallen below the margin call level. This notification may come in the form of an email, a message on the trading platform, or other communication methods.
Request for Action: The trader is usually required to take prompt action. The broker may request additional funds to be deposited into the account to restore the margin level or ask the trader to close out some positions to reduce the used margin.
Automatic Position Closure: If the trader fails to meet the margin call requirements within a specified period, the broker may automatically start closing out some or all of the trader's positions to reduce the used margin and prevent further losses.
Margin calls are a risk management mechanism implemented by brokers to protect both the trader and the broker from excessive losses. Traders should be aware of their account's margin call level, manage risk effectively, and avoid overleveraging positions to minimize the likelihood of margin calls. It's important to note that while margin calls are intended to prevent further losses, they do not eliminate the risk of losing the entire trading capital.