Have you ever opened a trade and realised you were trading too close to your margin call? Should you see the balance of your trading account, your heart may just skip a beat or two… Firstly, you need to fully understand the meaning of a margin call. A margin call is when the minimum amount you have deposited into your account has been spent on trades.
In simpler terms, you are trading with minimal funds and should your current trade turn unfavourable, your trade will automatically be terminated due to insufficient funds. But it does not stop there. You if you trade with a margin account, you are able to borrow money from your broker in order to fund the transaction. However, you need to be able to pay back the money you have borrowed. Thus, think carefully when it comes to margin accounts.
What to do if you receive a margin call notification on your account
As mentioned above, your broker will send you a notification once you reach your initial margin with a request to top up your account in order to fund your transactions. If you don’t top up your accounts, you can choose to manually terminate the trade and deal with the current loss. Should you wait for your trade to meet the margin mark; your broker can terminate the trade as well.
However, if you have an active arrangement with your broker regarding marginal fees, be aware that you would need to repay the money. Keeping in mind that you are able to borrow up to 50% of the total invested amount, you need to consider keeping your investments small, especially if you intend trading on margins.
What type of margin calls can a broker offer?
Depending on your investment, you would need to make use of one of two types of marginal trading methods. Brokers will, depending on your individual case, serve you with either a maintenance margin call or a fed margin call.
Maintenance margin calls
Once you have opened a trade with the said marginal amount, a maintenance margin call may come into play. The Federal Reserve Regulator requires a total of 25% but at times, brokerage firms require a higher value. In essence, a maintenance margin call means the trader needs to be able to maintain the account. Thus, you need to be able to maintain an equity amount of 25% or more for the maintenance margin call to stay activated. Should the amount fall below the required 25%, you will receive a margin call. Depositing funds to your account in order to maintain the said maintenance call will get your account back up to effective trading standards.
Fed margin calls
With Fed margin calls, you can expect initial margin amounts to range from about 50% to 70%. This, in essence, means that the trader needs to feed the account with funds. Some brokerage firms require traders to pay the said amount percentage before the actual trade is opened. Should you not adhere to these requirements, you will be notified with a fed margin call. Depositing funds into your account to satisfy the margin call will enable you to continue trading. However, if you don’t make a deposit, you could face a liquidation violation.
Many expert traders feel that trading with marginal accounts is like buying stocks on a loan account and suppresses the entire idea of trading on the Forex market. After all, it does not sit with anyone to feel confident enough that a marginal trade will be profitable. But when using expert strategies and evaluating market data to the T, you can make a margin account one of your best trading friends.
It is important to remember that marginal trading also carries an advantage as you are able to borrow money from your broker to fund a bigger trade. All you need to do is ensure you will actually be able to repay the amount. If not, you are obligated to, by whichever means, to satisfy the credit.