Foreign exchange (forex) trading allows traders to speculate on currency exchange rate movements and profit from buying or selling one currency against another. However, trading forex on margin comes with risks, including the dreaded margin call. This comprehensive guide will explain everything you need to know about margin calls, what causes them, how to avoid them, and what to do if you get a margin call from your forex broker.

What is a Margin Call?

A margin call occurs when the equity in your trading account falls below the margin requirement set by your broker. Brokers require traders to maintain a minimum margin level as collateral for leveraged positions.

For example, if your broker’s margin requirement is 5%, you need to keep at least $5,000 in your $100,000 trading account as margin. If your account equity drops to $4,500 because of trading losses, the broker will issue a margin call asking you to deposit more funds to bring the equity back up to the required $5,000 level.

Failing to meet a margin call can lead to your positions being forcibly liquidated by the broker to restore the margin level. So it is critical to understand margin calls and how to avoid them.

Why Do Brokers Issue Margin Calls?

Brokers require margin to protect themselves in case traders incur substantial losses that they cannot cover. With margin trading, brokers are essentially lending you money by allowing you to open much larger positions than you could with your own capital.

For instance, to open a $100,000 position with 1:100 leverage, you only need $1,000 in your account. The broker provides the remaining $99,000 on margin. If the trade goes against you and the losses exceed your $1,000, the broker needs to be able to close your position to limit potential losses on their end.

Issuing a margin call is a broker’s way of getting you to add more funds before closing out your position at a loss. This protects them from you defaulting on the loan.

How is Margin Calculated in Forex Trading?

Forex brokers require you to maintain a minimum margin level, which is usually around 1% to 5% of the total position size depending on the account type and leverage. So the margin requirement can be calculated as:

Margin Requirement = Trade Size x Leverage x Margin Percentage

For example, if you open a $100,000 EUR/USD position using 1:100 leverage with a 2% margin requirement, the margin needed would be:

$100,000 x 100 x 0.02 = $2,000

You would need to keep at least $2,000 equity to avoid a margin call on this trade.

Some key things that influence margin requirements:

  • Leverage – Higher leverage requires a lower margin percentage but increases risk. With 1:500 leverage, the margin may only be 0.2%.
  • Position Size – Larger positions require more margin capital. A $500,000 position requires 5x more margin than a $100,000 position with the same leverage.
  • Margin Call Level – Brokers often have a margin call level lower than the initial margin requirement as a buffer. For a 2% initial margin, the call may be at 1%.
  • Currency Pair – More volatile pairs like GBP/JPY have higher margin requirements than EUR/USD for example.

What Causes a Margin Call?

There are two primary triggers for margin calls in forex trading:

1. Running Losses

The most common reason for getting a margin call is sustain significant losses on open positions that draw down your account equity.

With leveraged trading, forex losses can exceed your capital very quickly if the market moves against you sharply. Even with stops in place, gaps in price action can lead to slippage on stop orders and outsized losses.

For instance, if you have $5,000 margin supporting a $100,000 position and the trade moves 100 pips against you, that equals a $1,000 loss. This loss cuts your equity by 20% to $4,000, which could trigger a margin call if it puts you below the broker’s requirement.

2. Increased Margin Requirements

Brokers can also increase margin requirements for existing open positions based on changing market conditions. This may be due to increased volatility or new economic and geopolitical risks.

If you already have positions open when the margin requirement rises, your equity will effectively be lower relative to the new requirement and could trigger a call.

For example, if you have $5,000 equity on a trade with a 1% margin requirement, and the broker raises that to 2%, you are now below the requirement and need to add funds.

How Much is the Margin Call Amount?

When a margin call is issued, the broker will specify an amount of additional margin that you need to deposit to satisfy the requirement. This amount depends on:

  • Your current equity
  • The initial margin and maintenance margin levels
  • The size of your open positions

Typically, the call amount will be enough to restore your equity to the initial margin level or even higher.

For example, if the initial margin is $5,000 and a trading loss brings your equity to $3,000, the call might be for $2,000 or more. This resets the margin back over the 5% level.

However, some brokers set the call level higher than the initial margin as a cushion against further losses.

How Much Time Do You Have to Meet a Margin Call?

Brokers usually give you 1-3 days to meet a margin call by depositing additional funds. However, in extreme market conditions, they may reduce this to several hours or less.

It is crucial to have funds readily available to transfer to your account in case you get a short-notice margin call. Having funds on standby can save you from forced liquidation.

Some brokers may offer ways to meet a call without depositing fresh funds, such as closing existing positions to free up margin capital. But these are not always viable solutions, especially in fast-moving markets.

What Happens if You Can’t Meet the Margin Call in Time?

If you do not or cannot deposit the required funds by the deadline, the broker will start closing out your open positions to reduce the margin exposure.

They will liquidate positions starting from the biggest losing trades first or the ones with the largest drawdown on margin. This will continue until the remaining equity meets the margin requirements again.

Forced position closures can be devastating as you are exiting the trades at losses without control or the ability to choose when and how to exit. It is best avoided by proactively managing risk.

How to Avoid Getting Margin Calls

Here are some tips to reduce the risk of getting a margin call:

  • Use lower leverage – The higher the leverage, the lower your margin cushion. Stick to leverage ratios under 1:30 if you are a beginner.
  • Risk small percentages – Risk no more than 1-2% of your account per trade to avoid large drawdowns.
  • Use stop losses – Managing risk with stop losses locks in profits and limits potential losses per trade.
  • Avoid correlated trades – Diversify positions across currency pairs and markets to avoid correlated losses.
  • Monitor margin usage – Check that your account equity covers margin requirements in the trading platform.
  • Trade on demo first – Build skills and develop a risk management plan using a practice account before trading live.

What to Do When You Get a Margin Call

If you do receive a margin call from your broker, here are some tips on addressing it:

  • Don’t panic – Carefully assess your options before acting. Knee-jerk reactions often make the situation worse.
  • Deposit funds to meet the call – Adding fresh margin capital is the safest option if you have the means.
  • Close losing positions – If meeting the call is not viable, close out losers to restore margin.
  • Partial close winners – Consider closing a portion of profitable trades to free up margin while still keeping positions open.
  • Contact broker support – Some brokers may provide temporary relief or other alternatives if contacted.
  • Review risk parameters – Analyze the factors that triggered the call and adjust position sizes, leverage, stops etc.
  • Take a break if needed – Step away and take a breather from trading after addressing the call if emotions run high. Come back with a level head.

Conclusion

Margin calls are a fact of life when trading forex on leverage. But being aware of how they work and taking proactive risk management steps can help you minimize the likelihood of getting margin calls. Always maintain enough margin buffer for open positions and have backup capital available to add to your account if needed. With proper risk practices, margin calls can usually be avoided.