Margin is an important concept to understand if you hope to become a successful forex trader. Margin can influence your trading either negatively or positively depending on how well you understand the market and what strategies you use. Nevertheless, no matter what you do, you must closely monitor your margin levels and avoid forex margin call at all costs.
What Is Margin Call in Forex Trading?
A margin call is a notification a trader gets from their broker, notifying them that their margin level has fallen below a certain threshold.
Other key things to remember:
- What is the margin? The minimum amount needed to maintain an open position with your broker
- What is a used margin? The amount of money tied up in your existing positions
- What is a free margin in forex? Also known as usable margin, free margin is the difference between your equity and used margin. It represents the amount of money in your trading account that’s not involved in any of your open positions. Free/usable margin can be used to open new positions.
- What is the margin level? A ratio of your equity to margin calculated as (equity/used margin) x 100
- What is the margin balance? The amount you have in your trading account when no positions are open
- What is the margin requirement? The money used as collateral to cover a trader position
- What is margin equity? Your margin balance plus your total floating profits/losses
How Does Margin Work in Forex?
Let’s say that Martin, an ambitious investor with a cool $10,000, wants to trade currencies. He opens a forex trading account, deposits the entire amount, and begins trading.
When Martin first logs into his forex trading account, $10,000 will be shown as the amount in the ‘Equity’ section of his ‘Account Info’ window.
He’ll also see that his usable/free margin is $10,000. His used margin, on the other hand, will be $0.00.
| Balance | Equity | Used Margin | Free Margin |
| $10,000 | $10,000 | $0.00 | $10,000 |
Let’s say Martin’s margin requirement is 1%, and he begins trading by buying 1 EUR/USD mini-lot at $100. His equity will still be $10,000. However, his used margin will move from $0 to $100. His useable margin will, on the other hand, drop from $10,000 to $9,900
| Balance | Equity | Used Margin | Free Margin |
| $10,000 | $10,000 | $100 | $9,900 |
If martin were to close out his position by selling his 1 EUR/USD lot at the same price he bought it, his used margin would go back to $0.00, and his usable margin would be $10,000.
However, martin isn’t just an investor; he’s also secretly an adrenaline junkie. So, he doesn’t just buy one lot. He buys 79 more lots. Martins is now 80 EUR/USD lots long because that’s just how he rolls.
Now, his equity still is $10000, but the used margin is $8000 (he bought 80 lots @ $100 each). His useable margin stands at $2000.
| Balance | Equity | Used Margin | Free Margin |
| $10,000 | $10,000 | $8,000 | $2,000 |
How to Calculate Margin Call Price
A seasoned trader can tell that Martin is taking an insane risk, given that he has just begun trading forex.
What is the margin impact? To answer this question, let’s see what would happen if EUR/USD prices fell.
Here, we’re assuming that Martin paid the same price for all 80 lots, has positions open for all 80 mini-lots, and that he’s losing $1 for each pip, the EUR/USD goes down.
So, each time the EUR/USD goes down one pip, Martin loses $80 (80 lots X $1/pip). Therefore, all of his usable margin will be depleted when the EUR/USD drops 25 pips.
| Balance | Equity | Used Margin | Free Margin |
| $10,000 | $10,000 | $8,000 | $0.00 |
Martin has lost $2,000, an equivalent of 20% of his entire trading account, and his free margin is now $0.00. His broker sends him a margin call.
Causes of Forex Margin Call
Margin call formula: Most forex brokers send out a margin call if their client’s margin level falls to 100%. This is what is known as the margin call level. If your broker offers a margin call level of 100%, then you’ll receive a margin call if your margin level drops to 100% or below.
Note that some brokers may offer a margin call calculator to their clients.
Margin call explained: A margin call level is a % threshold (level) set by your broker. If your margin level falls below the margin call level, a margin call is triggered.
A forex margin call could be an actual telephone call, but more often than not, it’s usually a message sent via text or email.
What Happens If You Receive A Margin Call?
Besides getting a notification, a forex margin call will also affect your trading.
For starters, you won’t be able to take on any new market positions; you can only close existing ones.
This is so because, for a forex margin call to occur, your floating losses will have depleted your account so much that your equity is now less than (or at least equal to) your used margin. Simply, you do not have enough free margin to open new positions.
Stop Out in Forex 
Nevertheless, Martin isn’t new to risky investing. In fact, he’s got ice in his veins, and his heart is still ticking at an easy 55 beats per minute. So, he isn’t interested in margin call selling at all.
Martin doesn’t close any of his open positions with the hope that the market will change and begin moving in his favor. Unfortunately, EUR/USD prices keep falling.
His broker might send him another margin call when his margin reaches another lower level. However, if the EUR/USD keeps falling, it’ll reach a point where the broker will have to close out all of Martin’s positions forcibly.
The margin level at which your positions are forcibly closed is referred to as the stop out level.
Closing positions once a stop out level has been reached prevents traders from losing more money than they have in their trading accounts.
How to Avoid Stop Out
Martin could have avoided reaching the stop out level by:
- Closing out some of the losing positions that he was holding in the market
- Depositing more money into his trading account (making a margin call deposit.)
Avoidance of Forex Margin Call
The rules are simple: as long Martin’s used margin doesn’t exceed his equity, he will not have a forex margin call.
Equity > used margin = no margin call
Equity ≤ used margin = margin call
Margin calls often happen to forex traders who use excessive leverage with inadequate funds while holding onto their losing positions for extended periods.
Therefore, if you want to avoid getting a forex margin call:
- Monitor your trades and account balance closely
- Keep your accounts well-capitalized by making regular deposits when needed
- Closeout positions that are no longer performing as you hoped they would
- Use stop-loss orders to minimize losses
- Implement risk management
Note: The forex market can be very volatile. There are times when market movements occur so fast that the broker doesn’t send the margin call or stop you out in good time—even for margin call on-demand accounts. If this were to happen, the chances of you completely blowing out your account are quite high. Hence, you have the ultimate responsibility of keeping a watchful eye on your trades and trading account.
