Margin trading is for many people one of the biggest motivators for forex trading. When trading in the currency market, you do not need to own $100,000 to open a $100,000 position on a currency. You will only need a fraction of this amount, for example, only $1,000, if your broker offers 1:100 leverage. This process is called margin trading, it is an effective tool for making big profits overnight — but it can also destroy you in a short period of time.
When joining a forex broker you will notice some margin call percentages and liquidation levels, which usually refer to what is called the account equity. For example, the broker may apply margin call at 20% while the liquidation level is at 10%. If you have an open position and the account equity falls to 20% of the margin required to be held in your account, the platform will issue a margin call. In this case, the function of the margin call is limited to being a warning and a strongly worded request recommending that you close some or all of your positions, or deposit additional funds to meet the minimum margin requirement. If you do these actions in time, you will be safe (but it is recommended to close positions as soon as possible and return to demo trading). But if you refrain from doing any of these procedures and prefer to keep your deals as they are, then the market continues to move against you and the account share drops to 10% of the required margin, then it will have reached the level of liquidation of deals (Stop Out). In this case, the platform will automatically close all your deals, starting with those with the biggest loss at the moment. If necessary, the broker will close all trades to meet minimum margin requirements.
Another variation of liquidating positions due to a margin deficit is to apply the margin call rule at 100%. This means that as soon as your account equity falls below 100% of the minimum margin requirement, not only will a margin call be issued, but all your positions will be closed out just as when the liquidation level is hit. This system does not issue any advance warnings or alerts — it closes trades directly.
How can you avoid these disastrous scenarios?
Avoiding a margin call and/or reaching a liquidation level requires you to trade with money that you can afford to lose. Having leverage doesn’t mean you have to use it! Many profitable traders only trade 2.5-5% of the account share – there is no reason to use this method, but it will become your best strategy if you are destined to succeed in the long run. But what should be done when the liquidation level is reached or a margin call is issued? Return quickly to the demo trading account until you regain your ability to make profits, and then move back to the stage of real trading.
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