What Are FOREX Margin Calls?
Forex margin calls are common when trading currencies online. A Forex broker will require you to open a margin account before you start to trade. The amount of the margin account varies from as little as $1,000 to as much as you want to risk trading. However, margin accounts are leveraged. That means that at any one time, you must have the broker's stipulated percentage of equity in your margin account to cover all outstanding trades. A margin call is a broker's demand that an investor deposit more money or securities to bring that investor's margin account up to the minimum maintenance margin, according to Investopedia.
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Leverage
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Leverage can lead to bigger profits but also to greater losses. Forex brokers offer a leverage of 1:100, which means you can trade in an amount than is 100 times the amount of cash (margin) you have in your account. Some also offer 1:200, which is only a 0.5 percent margin requirement; and a few allow as much as 1:400 leverage, which is a 0.25 percent margin requirement.
A prudent beginner should open an account with a broker who has a margin requirement of 1:100 and should make sure that stop-loss triggers are in place. A stop-loss trigger is a specified exchange rate at which a trade is automatically closed out to avoid losing too much money.
Margin Accounts
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Assume you are a beginner at currency trading and you sign up with an online Forex broker who offers 1:100 leverage.You deposit an initial $2,000 into your margin account. Your margin account is made up of five categories: your account balance, which at this stage is $2,000; your equity which is also $2,000; your profit/loss, which is zero at the outset; your used margin, which is also zero; and your usable margin, which is $2,000.
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Trading the Margin
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You decide to buy 15 lots (USD10,000x15=USD150,000) of the currency pair USD/JPY (JPY is Japanese yen) at 98.40. At the moment you do the transaction, your margin account will show these balances: account balance is $2,000, equity is $2,000, profit/loss is $0, used margin is $1,500, and usable margin is $500. As the market rate for USD/JPY moves in real time, so will the balances in your margin account. You don't specify a stop-loss trigger exchange rate.
Watching the Margin Account
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Suddenly a bad piece of financial news from the United States causes the dollar to depreciate and the yen to appreciate, and the USD/JPY rate moves from 98.40 to 98.07 in a couple of minutes. Your margin account, which is being updated as the rate changes, now shows an account balance of $2,000, equity of $1,495, profit/loss -$505, used margin of $2,005 and a usable margin of -$5. With an equity of $1,495, your margin is less than the stipulated 1 percent of your outstanding trades. You have to either credit your margin account so that the balance is at least 1 percent of your outstanding trade or leave your broker to close out the trade.
Margin Call
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You do nothing and your broker makes a margin call and closes out your trade at USD/JPY 98.04, leaving you with a loss on the trade of $551. (98.40 minus 98.04=0.36),(0.36x150,000=54,000), (54,000/98.04=551). Now your margin account has an account balance of $1,449, an equity balance of $1,449, a profit/loss of -$551, a used margin of $551 and a usable margin of 1,449. At this point you can now trade only up to $144,900.
Margin Cash Call
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Alternatively, under a prior agreement your broker could have made a margin cash call and funded your margin account from an agreed source so that the leverage ratio of 1:100 or 1 percent was maintained with your outstanding trade.
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