Getting a Margin Call is obviously a nightmare for any trader, and we know the problem.

So what is a margin call? Well, it is a broker’s demand to you as a client to bring margin deposits up to the initial margin level in order to keep holding current positions open. The margin call most frequently happens with a move to close your positions.

Technically, it is important to keep the value of the account higher than the maintenance margin level, otherwise your positions will simply be closed and this will result in a loss for you. Sometimes giving up on your trade and facing a loss is the right thing to do, but if your vision is different – you can avoid a margin call by adding more funds to your trading account.

So Here we are going to see :  What does Margin call mean? How to calculate Margin level? and How to avoid Margin call? So, let’s get started.

Your first job as a trader

Without a doubt, the first job as a trader is to protect your trading capital. If you get wiped out, there are no more trades to be had. This is what we use stop losses for, as it gets us out of the market when we are proven incorrect in our analysis. This is why keeping your margin under control is crucial, because you may not be wrong with your position longer term, but if you are too highly leveraged; you can be forced to leave the market before the trade has worked itself out.

By taking care of the margin, you give the trade “room to breathe”, and more importantly you give yourself a chance to be successful. You must keep in mind that the professional trader constantly worries about protecting their account. If you place intelligent trades and follow a statistically profitable system, the gains of course will come, over time.

What does “Margin Level” mean?

Margin level is a mathematical equation that effectively tells the trader how much of their funds are available for new trades. The Margin Level is the percentage (%) value based on the amount of Equity versus Free Margin. Margin Level allows you to know how much of your funds are available for new trades.

The higher the Margin Level, the more Free Margin you have available to trade.

The lower the Margin Level, the less Free Margin available to trade, which could result in something very bad…like a Margin Call or a Stop Out or Forced Closure from the brokers.

It is calculated with the following formula:

Margin level = equity/margin x 100%

If you don’t have any trades open, your margin level will be zero. Once a position is opened, the margin level will depend on several factors such as:

•  Volume

•  Leverage

How to Calculate Margin level

Let’s assume you have started your trading career with $1,000, which you have deposited in your newly created trading account.

You want to go long USD/JPY and want to open 1 mini lot (10,000 units) position. The Margin Requirement is 4%.

How much margin (Required Margin) will you need to open the position?

Assuming your trading account is denominated in USD, since the Margin Requirement is 4%, the Required Margin will be $400.

Since we just have a single position open, the Used Margin will be the same as Required Margin.

Let’s assume that the price has moved slightly in your favor with a profit of 10$ and your position is now trading $1,010.

This means that your Floating P/L is $10.

Let’s calculate the Equity:

The Equity in your account is now $1,010.

Equity = $1,010, Balance = $1,000, Floating P/L = $10

Now that we know the Equity, we can now calculate the Margin Level:

The Margin Level is 252.5%.

In the example, since your current Margin Level is 252.5%, which is way above 50%, you’ll still be able to open new trades. As long as the Margin Level is above 50%, then your account has the “green light” to continue to open new trades.

If the Margin Level is 100% or less, most trading platforms will not allow you to open new trades.

This is the reason why you must not take excessive leverage or utilize your full margin. Using excessive leverage and having a lower margin is the deadliest combination a trader may face.

 Margin call, Stop Out Level and Forced closure

If the equity in your account falls below 50% of your margin requirements, you will receive a margin call .The margin call is informing you that you have insufficient equity in your account and you should either close some of your positions, or top-up your account with appropriate funds. You can close, or partially close your positions from your MT4/MT5 terminal, or log into your client area and top up your account with a credit card, or one of our other instant funding options.

If you ignore the margin call warning and your equity continues to fall, the new “stop out” level begins – it’s at 30% stop out occurs. At this point, the trading terminal will close automatically as per the Broker setting. Automatically closing the open positions – a process called “stop out”. The stop out occurs when the existing positions are going against the traders, which means they are losing money and the available equity is slowly reducing. When the margin level gets to 30%, as per the broker setting the trading terminal will start closing the positions until the previous level is restored.

What are the best ways to avoid the Margin Call?

If we combine all the causes of the margin level & margin call together into a list, the main reason that leads to the margin call is the following: the use of excessive leverage with insufficient capital whilst holding onto losing trades for too long when they should have been cut. To tell the truth, proficient traders almost never experience margin calls. They manage their trades well enough and apply different steps. So let’s take a closer look at them.

1) First of all, monitor your account on daily basis. In addition, do not forget to use stop loss orders to reduce your risk exposure. Effective money management increases your chances to avoid the margin call.

2) You might also consider that one of the best ways to avoid margin calls is not to use leverage. As alternative, you can keep your use of margin at the low end of your borrowing limit. Hence you can limit the leverage to no more than 10-20%. Thereby, you will have some leverage to improve your performance in a risky market, yet enough to avoid triggering a margin call.

3) Another step you can take is to review your portfolio composition. If you diversify your portfolio across a broad range of shares or managed funds, you can potentially mitigate the risk of receiving a margin call in times of high volatility.

4) You should keep additional liquid resources at the ready if you need to add either money or securities to your margin account.

By following the above ways you can easily avoid the Margin calls.