The Danger of Margin Calls in Trading, Prevent It This Way

Posted on

Margin Call, for those of you who are in the world of trading, you must be familiar with the term margin. Margin is the number of funds needed to keep a trading position open.

What are margin calls?

Now, when the margin funds are not enough and cannot sustain a trading position, then you will get a notification called a margin call.

A margin call is a warning system that indicates that the equity of the trading account is insufficient for the margin required to open a position (margin requirement).

If the loss of the trading position continues to increase and the equity value continues to decrease far from the margin requirement, the broker will close part of your trading position until the margin requirement is met again.

This closing process is called a stop-out. Some Indonesian traders are still mistaken in interpreting a stop out with a margin call. In fact, margin calls are a savior and reminder feature for traders who are about to run out of capital.

Margin Call Level

Each broker has its own level of margin requirements to determine the margin call, find out here

There are several levels of margin call, depending on the trading strategy of each broker. In general, there is a margin call placement level at 100 percent, some are at 40 percent.

100% level

A 100% margin call means that you will get a warning from the broker if the value of your equity is equal to the 100% margin requirement.

For example, the broker’s margin requirement is US$135 and you currently have US$7000 worth of equity. If you experience a loss of up to US$6,865 so that there will be US$135 left in your account, then you will get a margin call.

40% level

Some brokers place a 100% margin call, some other brokers place a 40% margin call.

When the broker you choose places a margin call at the level of 40% it means you will get a warning from the broker if your equity value is equal to 40% of the Margin Requirement.

For example, a broker’s margin requirement is US$135, so the broker’s margin call is 40% from 135, which means US$54.

So, if you use the same example, then you will get a margin call if you experience a loss of up to US$6,946 or when your account funds only have US$54 left.

Cause of Margin Call

So, before avoiding margin calls, it is important to know the causes of the following margin calls so that you can avoid them:

Too many open trading positions

Opening a lot of trading positions is sometimes tempting because it can get big profits. However, if you open too many trades, it can also bring losses that are not small. This loss can then trigger a margin call.

Not setting a stop loss

If you leave a losing position on a trade then it will potentially experience a margin call. The bigger losses will slowly deplete the free margin until a margin call occurs.

Deposit is too minimal

All traders will be happy if they can deposit a minimum but can get maximum profit. But unfortunately, it can be dangerous. If you have small funds, then even trading with small lots can easily run out of free margin.

Can’t control emotions

Even though they have implemented a stop loss, traders often ignore it. Some traders have reached the loss tolerance limit in a day, instead of stopping trading, but instead got carried away with emotions so they decided to continue to open positions.

Trading conditions that are influenced by emotions will only result in losses until they are hit by a margin call.

Therefore, it is important to manage emotions when trading and be disciplined about the risk management that has been planned.

How to Prevent Margin Calls

A margin call is a call if the funds you use for trading have reached the limit so that it needs to be increased. Getting a margin call means something is wrong with your trading management. Prevent margin calls this way:

Close the trading position or inject (add capital) before being hit by a margin call

If the funds in your account have almost reached the margin requirement, there are 2 ways you can do it.

First, you can close a trading position, even though it is still in an open trading position (floating), this is important to do to prevent losses.

The second way is that you can deposit a certain amount of funds with the broker so that the resilience of your funds increases.

If you do not deposit funds immediately, the trading position will be forcibly closed by the broker and usually, accounts that are already known for margin calls cannot be saved anymore.

Choose the right leverage

Leverage can help you to get profit with minimum capital, but it can also cause diseases such as overtrading or over a lot.

This condition causes your position to be vulnerable to a margin call. So, the main step to avoid margin calls is to choose leverage appropriately and wisely.

Use good money management

You can minimize the occurrence of margin calls, and will not even experience margin calls if you do good money management.

You can allocate only 2 percent of the equity in any one trading position. For example, suppose you have a trading account with equity of US $7000. If in one position only allocate 2% of the capital, then you only need to use US$140 of the account.

Set and make friends with stop loss

Setting a stop loss will help you limit losses, so margin calls can be avoided from the start. However, do not just set it but still open a position if the loss has reached the limit.

Set a stop loss and be disciplined in running it will really help you to prevent margin calls

So, margin calls need to be avoided because when you get a margin call it means your money is running low so it can’t be used for trading.

In addition, once you experience a margin call, it means that you need 100% profit to cover the losses from the previous margin call.

Leave a Reply

Your email address will not be published. Required fields are marked *