Margin Call

You're in serious trouble if your margin falls below the prescribed limit (say, 1%).

Once it falls below that limit you risk not only losing most of your initial investment, but also risk going into debt (i.e. your account falling into a negative balance).

Fortunately, your broker will not allow that to happen. He will issue warnings as your margin nears the limit. These are referred to as margin calls. Every trader dreads the red pop-up that warns ominously that you're approaching the limit. A margin call is really a demand for additional funds.

Since you may not be able to immediately deposit additional funds to improve your margin, your broker will ask you to close one or more of your open positions (trades). If you ignore those 'requests', and the trade continues to move against you, your minimum margin may be hit. Bad news!

The moment your margin touches the limit, your broker will automatically close all your open positions. Your unrealized losses will immediately become actual losses, reducing your account balance.

This process ensures your account is never overdrawn. You cannot lose more than you invested, even in a volatile, fast moving market. It also serves to protect your broker.

The traders most at risk of margin calls are those who decide to ride a losing trade in hopes that it will eventually turn around into profit. Those who trade a large proportion of their account balance (i.e. trade with a lot of leverage) are equally at risk. More on that later.

While trading on margin can be profitable, it is important that you take the time to understand the risks. Make sure you understand how your margin account works. And be sure to read the margin agreement between you and your broker.

As stated before, margin calls can be avoided by monitoring your account balance on a very regular basis and by using stop loss orders (discussed later) on every open position to limit risk.

Most brokers provide an account summary window on their trading platform. This provides traders will real time information about their trading account, including margin analysis. The following information is included:

Account Balance The amount of money resulting from the sum of all deposits and realized gains less all withdrawals, realized losses, costs and fees.

Unrealized Gain / Loss The net P&L on all open positions (trades), calculated at the current rate. This amount changes as the rate fluctuates.

Margin Balance Represents Account Balance plus the sum total of current unrealized gains / losses.

Maximum Deal Available The maximum position you are allowed to trade, based on leverage and account balance.

Margin Left The margin balance (remaining) expressed as a per cent.

Too much margin can be dangerous. You must thoroughly understand your broker's policies regarding margin, and ask yourself whether you are comfortable with the risks involved.