What is a Margin Call?
What does “Margin Call Level” or “Margin Call” mean?
In forex trading, the Margin Call Level is when the Margin Level has reached a specific level or threshold.
When this threshold is reached, you are in danger of the POSSIBILITY of having some or all of your positions forcibly closed (or “liquidated“).
The Margin Level is the “metric” and the “Margin Call Level” is a specific “value” of the metric (which is the Margin Level).
Yeah, it’s awkward. But don’t blame us, we’re not the ones who name these things.
For example, some forex brokers have a Margin Call Level of 100%.
In the specific example above, if the Margin Level in your account falls to 100% or lower, a “Margin Call” will occur.
Not familiar with the concept of Margin Level? Read our lesson, What is Margin Level?
What is a Margin Call?
A Margin Call is when your broker notifies you that your Margin Level has fallen below the required minimum level (the “Margin Call Level”).
This notification used to be an actual phone call, but nowadays, it’s usually an email or text message.
Regardless of how you’re actually notified, the feeling isn’t great.
A Margin Call occurs when your floating losses are greater than your Used Margin.
This means that your Equity is less than your Used Margin (since floating losses reduce your Equity).
“Margin Call Level” vs. “Margin Call”
Traders tend to get confused between a Margin Call Level and Margin Call.
- A “Margin Call Level” is a threshold set by your broker that will trigger a “Margin Call”. It is a specific percentage (%) value of the Margin Level. For example, when the Margin Level is 100%.
- A “Margin Call” is an event. When a Margin Call occurs, your broker takes some sort of action. Usually, the action is “to send a notification”. This event only occurs when the Margin Level falls below a certain value. This value is the “Margin Call Level”.
Think about boiling water.
For water to normally boil, the temperature must reach 100° C.
- The Margin Level is equivalent to temperature. Temperature can vary and can be any number like 0° C, 47° C, 89° C, etc.
- The Margin Call Level is equivalent to 100° C, which is a specific temperature.
- A Margin Call is equivalent to water boiling, the event when the liquid changes into a vapor.
Example: Margin Call Level at 100%
Let’s say your forex broker has a Margin Call Level at 100%.
This means that your trading platform will send you a warning notification if your Margin Level reaches 100%.
Margin Call Level = Margin Level @ 100%
Aside from receiving a notification, your trading will also be affected.
If your account’s Margin Level reaches 100%, you will NOT be able to open any new positions, you can only close existing positions.
A Margin Call Level at 100% means that your Equity is equal to or lower than your Used Margin.
This occurs because you have open positions whose floating losses continue to INCREASE.
Let’s say you have a $1,000 account and you open a EUR/USD position with 1 mini lot (10,000 units) that has a $200 Required Margin.
Since you only have one position open, Used Margin will also be $200 (same as Required Margin).
At this point, you still suck at trading so right away, your trade quickly starts losing.
It’s losing big time. (You really suck at trading.)
You’re now down 800 pips.
At $1/pip, this means you have a floating loss of $800!
This means your Equity is now $200.
Equity = Balance + Floating P/L $200 = $1000 - $800
Your Margin Level is now 100%.
Margin Level = (Equity / Used Margin) x 100% 100% = ($200 / $200) x 100%
Once the Margin Level reaches 100%, you will NOT be able to open any new positions unless:
- The market reverses back in your favor.
- Your Equity becomes greater than your Used Margin
If #1 doesn’t happen, #2 is only possible if you:
- Deposit more funds into your account.
- Close out existing positions.
The account will be unable to open any new positions until the Margin Level increases to a level above 100%.
What happens if your sucky trade continues to go against you?
If this happens, once your Margin Level falls further to ANOTHER specific level, then the broker will be forced to close your position.
The other specific level is known as the Stop Out Level and varies by broker.
If a Margin Call event is the equivalent of water boiling, a Stop Out event is the equivalent of being burned by the boiling water!
Let’s now discuss what a Stop Out Level is in further detail.