All traders fear the dreaded margin call.
It’s not a great feeling.
This occurs when your broker notifies you that your margin deposits have fallen below the required minimum level because an open position has moved against you too much.
While trading on margin can be profitable, you must take the time to understand the risks.
Make sure you fully understand how your margin account works, and be sure to read the margin agreement between you and your broker.
Always ask any questions if there is anything unclear to you in the agreement.
Your positions could be partially or liquidated should the available margin in your account fall below a predetermined threshold.
You may not receive a margin call before your positions are liquidated (the ultimate unexpected birthday gift).
If money in your account falls below margin requirements (usable margin), your broker will close some or all open positions.
- This can help prevent your account from falling into a negative balance, even in a highly volatile, fast-moving market.
- Margin calls can be effectively avoided by monitoring your account balance on a very regular basis and by utilizing stop-loss orders on every open position to limit risk.
- Keep in mind though that your stop loss may experience massive slippage when the market is moving fast!
If you are going to trade on a margin account, you must know what your broker’s policies are on margin accounts and that you understand and are comfortable with the risks involved.
You should also know that most brokers require a higher margin during the weekends. This may take the form of a 1% margin during the week and if you intend to hold the position over the weekend it may rise to 2% or higher.
Brokers also may have different margin requirements for different currency pairs so pay attention to that as well!