Margin is one of the reasons forex trading has become so common and popular nowadays. It allows traders even with little capital to participate in what would usually be a hundred thousand dollar trades at the minimum. However, margin can also turn into a poison pill when you’re on the wrong side of the market. Trading on margin can be a useful way of making your capital go further, enabling you to make profits far in excess of traditional trades without having to commit to a larger deposit. But it also comes with the risk of much larger losses, which can even exceed the amount of capital in your account.
In simple terms, Margin Call can be defined as a wake-up call or demand made by a broker to the trader or the investor asking them to deposit more securities or money into the account so that a minimum margin can be maintained. This usually happens when the value of one or more of the total securities in the traders’ account, which had been purchased with borrowed money, depreciates beyond a certain point. In such cases, the investors or traders are required to either deposit extra money to cover the deficit or sell part of the assets in order to cover the losses.
Two simple ways to prevent a margin call are keeping your account well-capitalized and learning to cut your losses short to let your profits run. These two simple components should be part of any Forex Trading Strategy. Well-capitalized accounts are not just a 'nice thing to have,' but rather a necessity in nearly all financial markets. The ability to close out a trade that is no longer working in the manner you hoped helps to ensure you are still around for the next opportunity the market presents.
By taking the following measures a trader can protect himself from the margin call: A margin call can be avoided by depositing the additional amount in the account; Give attention to the market changing the environment and take timely decisions according to the dynamics of the forex market; By obtaining the historical information relating to the underlying trading venture and with the help of analysis before entering into the trade. One can protect himself from this risk alarming situation; The use of unadventurous leverage means less exposure to risk or vulnerabilities; Try to avoid overtrading and overleveraging; Adoption of a diversification strategy.
How to avoid a margin call? A simple answer to this question is to simply have a lot of funds in a trading account and to constantly add more than the open positions. Unfortunately, while this will certainly work, it is not usually realistic. The idea behind Forex trading and trading, in general, is to grow an account in such a way that in the end trading for a living becomes a reality. A sound money management plan is the cornerstone in avoiding a margin call. You can lose money in a trading account, but the broker will not give you a margin call if you are applying money management and risk management correctly.
