Definition of What is Margin Call in Forex Trading

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There are some people who are curious about what a margin call is. Here, definition of what is margin call will be discussed briefly. A margin call occurs when a trading account does not have sufficient amount of money anymore to support the trades that are open. The margin call situation is likely to happen if there are a large number of floating losses.

The situation can be illustrated as follows. If the leverage that you are using is 200:1 and the account that you have is $20, and then you use $10 for opening a trade, then it means that the size of your trade on the market is $2000. Each of the pips will be worth more or less 20 cents. If the market changed against you by 50 pips, then it means that it will be a floating loss of $10. Because you need $10 to have your trade keep opening, you will not have sufficient margin anymore to keep your trade open if the floating loss is $10.01. If this happens, your broker will close your trade automatically inasmuch as you do not have sufficient margin anymore to hold the $2000 trade on the market.

forex trading margin call definitionFrom the above illustration, you can see the working system of a margin call. The definition of what is margin call can also be explained like the following. If at least one of the securities you already bought had a value decrease more than a certain point, then you would get a margin call from a broker. In other words, if the margin that is deposited in the margin account is lower than the minimum margin requirement, the exchange or the broker produces a margin call.

Now the investors have to either raise the margin that they have posted or close their position. The investors can close out their position both by selling the securities, futures or options if they are long and by buying them back if they are short. However, if none of these is done, the broker can put their securities on the market to meet the margin call.

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