What is margin call in Forex and how traders end up there?

06 March 2020

When a trader uses the margin to leverage higher trading positions and potentially receive higher payouts, it is usually a good idea to check the balance between the available funds on their balance (available equity) and those that are taken by the broker (used margin).

The ratio between the two is called the margin level and it enables traders to see whether they can open new trades or not. There are three stages within the margin level. The first stage is above the 100% margin level, where a trader can still open new positions and maintain existing ones.

There is exactly the 100% margin level, where a trader can maintain positions but cannot open new ones. Then we have below 100%, where traders cannot even maintain the existing positions. That’s when the Forex margin call happens.

When the margin level goes below 100%, the broker can initiate a margin call - notify the trader that they need to either deposit funds on their account or close positions (“liquidate”) until the 100% level is restored. This is called the margin call level - a point where the margin call is issued. If a trader fails to close positions or deposit funds to their account, the broker will be able to liquidate the trader’s positions.

What happens before the margin call in Forex occurs?

As we have already discussed, trading Forex requires large deposits and position sizes in order to get significant results. Of course, trading is possible with smaller deposits as well but they’re usually not sufficient to bring sufficient payouts. Therefore, many traders use margin accounts to leverage higher trading positions.
Margin call in Forex

Main elements of margin trading

When using the margin account, there are certain elements that a trader needs to know to have a better idea of what they are dealing with. So, before jumping to what does margin call mean and how does it work, here are some of the elements:

Available equity: a sum of money left on the account balance that can be used to open new trades with leveraged positions. The more available equity a trader has, the better for his/her trading account;

Used margin: a sum of money that the broker took from the trader’s account in order to open a leveraged position. The more used margin a trader accumulates, the less he/she can open new trades;

Free margin: a sum of money left from the account balance after the broker took the used margin. It shows that there is still a certain amount left that can be used for starting additional trades;

Margin level: a value received by dividing available equity to used margin, represented in a percentage. It indicates the ratio between the available and used funds and shows whether it’s possible to open new positions. The higher the margin level, the more trades can be started.

Maintenance margin: a certain point of margin level necessary to at least maintain the existing trades. Various service providers have different values, but the most popular one is 100%. Therefore, if the available equity and used margin become equal, a trader cannot open new trades.

When do margin calls happen?

The elements we discussed above are necessary to keep track of the account balance and make sure that nothing unexpected happens. However, no trader can be certain that the currency prices don’t fall and their account balance doesn’t reduce.

When such things happen, the margin level starts to decline. It is even possible to go below 100%. In this case, the Forex broker will notify a trader that their margin level is below the maintenance margin, there are no funds on their account to maintain even the existing trades, and they need to deposit more funds to restore the balance.

As an alternative, traders can also close some of their trades (“liquidate”) until, again, at least the maintenance margin is restored. The notification received from a broker is called a margin call and it is usually in the form of an email or a text message.

Margin call example

What is a margin call? To understand this process more easily, let’s take a look at the example: Let’s imagine that you have $5,000 on your account balance and want to open a short position (sell) for USD/JPY position with 1 lot (100,000 currency units). For this example, the required margin will be 3%, therefore, the broker takes $3,000 from your balance.

In this case, the used margin will be $3,000 while $2,000 will remain as a free margin. In total, you will still have $5,000 available equity on your account because the trade hasn’t started and payouts/losses haven’t occurred yet.

So, you have opened a trade, sold a USD/JPY currency pair for one lot and are expecting the price to go down. However, it seems the fortune is not on your side and the price starts to go up. Let’s imagine that the price declined so much that it resulted in a $2,000 loss for you.

At this point, you have $3,000 left as the available equity, while the free margin is already zero. Do you remember what a margin level is? It is a ratio between available equity and used margin. In our example, the margin level will be 100% (3,000/3,000x100%). At this point, a broker will probably send you a margin call, asking you to either refill your account or liquidate the trade.
What is margin level in Forex

Margin call level vs margin calls explained

The point where your broker initiates a margin call is called the margin call level. While it is similar to the margin call, the two terms are not the same.

A margin call is a notification about reducing funds and the suggestion to refill the balance or liquidate trades. It’s essentially an event occurring at some point in Forex trading.

Whereas a margin call level is a certain point of the margin level which leads to the margin call. It’s basically an answer to this question: When is margin call occurring? For example, if a margin call level is 100%, and the margin level starts to go below this point, the broker will send a margin call to its client. Therefore, the two terms are interconnected but still are not the same.

Be careful about going below 100%, especially if it’s below a certain point

Now, to get back to our example, let’s imagine that the price on USD/JPY doesn’t stop there and continues to decline. And right after it crosses the 100% line and a trader fails to refill the account, the broker gets the ability to liquidate trader’s positions manually.

But even at this point of margin call level, a Forex broker can choose not to do that and wait for further developments. Maybe the price starts to recover and bring lost funds back. Therefore, at this point, not everything is lost and the liquidation of positions depends on a broker.

However, if the price still continues to decline and your margin level goes even lower the Forex margin call level, a trader gets to the new level - the “stop out” level. Various Forex brokers have different stop out level requirements, but usually, it varies around 50%. Therefore, when the margin level comes below 50%, your broker will start an activity called a “stop out”.
Negative margin Forex

At this point, a broker will close/liquidate the most unprofitable positions that are damaging the overall account most. This process will last until the margin level is back at least above the stop out level.

But unlike the margin call level, where positions can also be liquidated, in a stop out level, this process is automatic and the broker cannot choose not to close trader’s positions.

Traders are usually very careful about their margin levels and do their best not to reach the margin call level, not to mention the stop out level.

Is margin call good or bad in Forex trading?

So, what is and how to avoid margin calls? A Forex margin is a tool that allows traders to open large position sizes without actually investing tens of thousands or even hundreds of thousands of currency units. Their Forex brokers take a certain sum from their account as a service payment and lend them larger funds.

A total amount of funds on the account balance is called the available equity, while the money taken by a broker is called used leverage. These two elements and a margin level calculated by using them enable traders to see whether their funds are sufficient to open a new trade or maintain the old ones.

If the margin level is above 100%, a trader can do both of these things: open new trades and maintain existing ones. If it reaches 100% (maintenance margin), a trader will only be able to maintain the existing trades and a broker will initiate a margin call. A margin call is a notification from the broker that notifies its client to deposit additional funds or close some positions so that the margin level doesn’t go below 100%.

But if it does, a trader will reach the margin call level. At this point, the broker can close open positions on its own, but it is not automatic - it can choose not to do that. But if the margin level goes below 50% (it varies from one broker to another), the new level called “stop out” level will emerge. Here, trading positions are closed automatically until the margin level goes above 50% at least.

FAQ on margin call in Forex

What is the used margin in Forex?

When using a margin account in Forex, traders get the ability to open considerably larger positions with smaller deposits. In this case, the broker will have a certain margin requirement (reflected in percentages) that will indicate how much of their own money they should deposit.

If a trader has, say, $5,000 on their account and a trade position is a mini lot ($10,000) with a margin requirement of 5%, a broker will take $500 from the trader’s balance in order to keep the position open.

In this case, the money taken by a broker ($500) is called used margin and it is one of the main elements of determining how much funds a trader has to open new trades. Using available equity and used margin, a trader can calculate a margin level and try to avoid margin call in Forex.

What is margin call in Forex?

When getting a margin call Forex signal, you're notified by your broker that your available equity is running out and you're in danger of getting into the negative account balance. While the ratio between the available equity and used margin varies from one broker to another in order for them to issue a margin call message, the usual rate is 100% - when available equity and used margin are equal and there's no additional money for opening the new trades. When this occurs, your broker notifies you to refill your account balance or at least close some leveraged positions to restore the balance.

How does margin call work?

When a trader opens leveraged positions using their margin account, they receive large funds from their broker. However, the broker still requires a certain margin requirement (used margin) from its client to make sure a trader is serious about opened positions.

A Forex broker takes that money from the trader’s account balance. The more positions are placed, the larger the used margin. There is a limit to how big it can become.

The available equity is basically a whole account size of the trader and that’s what is compared to the used margin. If the available equity is more than the used margin, a trader can open new trades.

However, there are moments when the two indicators become equal. This is called a zero margin (or maintenance margin) and it marks the point when brokers start sending margin calls to their clients - notifications to refill the account.

What happens if your free margin hits zero?

As we explained within the section for what is margin in Forex, free margin is the avilable sum of funds that you haven't yet used to open a new position. When there's still some free margin available on your account, you stand the chance of initiating new trades. But once it hits zero, you're getting a margin call. And what is margin call? It's a notification from your broker, urging you to refill your account balance or at least close some existing positions, as discussed along with the margin call definition.