Every broker requires a minimum margin to execute a position when your margin falls below those requirements, the broker will then liquidate your positions, this is known as ‘Margin Call’. The broker protects your balance from falling to a negative balance, that’s when there isn’t enough margin to hold all your losses.
It is also important to understand how the margin call works – as there are a lot of calculations involved. It’s best to use one of the MetaTrader’s platforms to no exactly how the margin call is determined – like understanding how the Margin Level works.
When there are no positions opened your balance will be the same as your equity, and your profit/losses will be at 0 (zero). It is always wise to leave enough room (margin) to avoid Margin Calls. Enough Margin will hold your losses as well. Here are the formulas used to calculate the Margin Level.
- Margin Level (% – in Percentage) = Equity / Used Margin
- Equity = Used Margin + Free Margin ( “Free Margin” is withdrawable while there are no open positions)
- Equity = Balance + Profit – Loss
Margin Call is determined by a broker, and your broker might determine it by 8% Margin Level, if your equity equals used margin x 8%, Margin call will definitely happen – this is also realized when your open positions close one by one until there’s enough margin to cover your losses – you will be able to see this on MetaTrader, as you won’t need to make your own calculations – it’s been calculated for you on the trade tap of your MT account.
You’ll realize this when you open a position, you’ll be able to see your margin level percentage. Know your broker’s minimum margin level, and on the above example, margin level should be above 8%.
NOTE: if your margin level is less or equal the broker’s minimum margin level, Margin Call will happen – and that’s what we don’t need. What you should keep in mind is that Metatrader uses 100% margin level, since when Used Margin = Equity, Margin Call happens.
- Trader‘s Initial deposit: $400
- Buys GBP/USD at 1 mini lot (10000 units) with a Leverage: 1:500
- Margin Requirement: 10000 x 0.002 x 2.0000 = $40
- Hence this is called a good faith deposit.
- The broker will temporarily hold $40 as Margin.
It is advisable to know the ins and outs of all types of margins, and how they work and so, you can be able to estimate the amount of margin needed to hold your losses.
Here’s another example: (Margin Level System) Imagine if the broker determines Margin call at 7% if the equity approaches 7%, Margin Level = 7% x Used Margin = 7% x $40 = $2.
Margin Call will happen if the equity falls to $2 or less – bear in mind that this means $400 – $2 = $398 margin (This is what’s left to hold your losses)
Equity = Used Margin
In this case, if the equity approaches 100% Margin Level, Margin Call will happen if the equity falls to or less than $40.
This means $400 – $40 = $360 (Now this amount left is your Margin left to hold your losses)
Now that you got a hang of the Margin Call, it’s best that you learn other terms like Stop Loss, Take Profit, Trailing Stop, Hedging and Averaging, and other techniques. Let’s make trading our everyday’s lives.