M
argin Call Level is one of the scariest things for every trader.
You don’t want to hear or see it, but in order to not reach this level, you need to know about this monster.
There is a specific level or threshold, which shouldn’t be crossed. If you have reached this level, you will have a Margin Call.
After reaching this Margin Call level, you are in jeopardy of being forced to liquidate all your positions.
Margin call level represents a specific value of the metric, which is also called Margin level(metric).
Every broker decides what is the admissible level you can reach before you get a Margin call. Some forex brokers have a Margin Call Level of 100%.
Like we said, if the Margin Level in your account falls to 100% or lower, a “Margin Call” will occur.
What is a Margin Call?
You will get notified by email or text message by your broker when your Margin Level is below the required minimum level.
Prepare yourself that something like this is not impossible to happen. You will be neither the first trader to experience it nor the last one. It is important that you don’t panic and take the right decision for the current situation.
When your floating losses are bigger than your Used Margin, meaning that your Equity also is LESSER than the Used Margin, you will get this nasty message saying MARGIN CALL.
“Margin Call Level” vs. “Margin Call”
Don’t confuse a Margin Call Level with a Margin Call.
Your broker sets a threshold (“Margin Call Level”), which is represented in percentages (usually it is 100%). Reaching this level leads to triggering a “Margin Call”.
The “Margin Call” is the EVENT. When it does happen, you will receive a notification that the Margin Level fell below a certain value (Margin Call Level).
The good equivalent of the Margin call Level is the temperature needed for the water to start boiling.
It needs to reach 100° C, then the water is boiling.
Same as Margin Call Level, which needs to reach 100%, then the Margin Call will occur.
Margin call = evaporating of the water
It already sounds like a horror movie, where the main actor is gonna be boiled alive in hot water…..
You won’t be boiled, but watch out because you can lose your money!
After receiving a notification saying that you have reached the Margin Call Level, you will notice a change in your account.
You WON’T BE ALLOWED TO OPEN ANY NEW POSITIONS.
But you will be ALLOWED TO CLOSE YOUR EXISTING POSITIONS.
At that point, your Equity will be equal to or lower than your Used Margin, because the FLOATING LOSSES on your opened positions continue to INCREASE.
Let’s say you have a $1,000 account and you open a USD/CAD position with 1 mini lot (10,000 units) that has a $200 Required Margin.
Since you only have one position open, Used Margin will also be $200 (same as Required Margin).
At this point, your trade quickly starts losing.
It’s losing big time.
You’re now down 800 pips.
At $1/pip, this means you have a floating loss of $800!
This means your Equity is now $200.
Equity = Balance + Floating P/L
$200 = $1000 – $800
Your Margin Level is now 100%.
100% = ($200 / $200) x 100%
Margin Call Level Example with USD/CAD having a Floating Loss
Once the Margin Level reaches 100%, you have ONLY TWO options if you want to return on the market and open new positions:
1.The market reverses back in your favor.
OR
2.Your Equity becomes greater than your Used Margin, which can happen by depositing more funds into your account or closing out your existing positions.
Unless the Margin Level increases to a level above 100%, your account won’t be able to operate or open any new positions.
But your unlucky day might not stop there.
There is another level below the Margin Level, called STOP OUT level.
Find out more about what is worse than MARGIN CALL in our next article. It is a tough one, but you need to realize that you should be 50 times more careful than you have thought while trading.
