When trading Forex and Contracts for Difference (CFDs) most brokers offer leverage trading or trading on margin. You can learn more about gearing, leverage and margin in our article and video here. Margin trading is used to allow for greater opportunities for larger profitable outcomes, if an individual does not have the necessary capital. Forex and CFDs traders can make larger trades with less capital BUT do remember this comes with increased risks. Margin trading, which is trading with leverage allows for potentially bigger profits AND larger possible losses.
A margin call occurs if losses become too large with respect to the amount deposited in the trading account. The margin call is a notice that the trading account needs additional funding to in order to avoid current positions being automatically closed.
Here we look at ways in which the individual trader can avoid margin calls and therefore, better understand how to protect their capital.
Understand what a margin call is?
If you are trading Forex and/ or CFDs, then you should be aware if your account is a leveraged account. If it is, then you will need to understand margin and be a able to maintain margin requirements. The margin requirement is the capital required in your account to allow you to sustain the current open trading positions. If the capital in your account falls below the margin requirement, the broker will issue a margin call. The margin call is a request to add funds to your trading account. The margin call is usually done through an automated message from the broker via email or via a message on the trading platform, maybe even an SMS, text message alert. It is key to be aware of the margin requirements and keeo track of the positions you have open, in order to safeguard against margin calls and to ensure your capital is safe.
Know the margin requirements
When using leverage to trader CFDs or Forex, do NOT ignore margin requirements. Traders should consider margin requirements before entering trades, in order to reduce the risk of quickly receiving a margin a call when the trade is entered. This means having a good understanding of position sizing and factoring in the margin amount to guarantee funds are available.
Set stop losses
Stop losses are a particularly efficient means to avoiding margin calls and protecting your capital, in order to avoid margin call limits even being approached. Stop losses are set to exit an open position through a certain price level and you can learn more about stop losses in our article and video here.
Employ good risk management
The use of risk management means only risking a certain percentage of the trading account in any single trade. You can read more about risk management in our section here. Good risk and money management means a margin call is less likely.
Losing is part of trading
Losing is all part of the trading process. No trader always makes profits. There will be losing traders ad this is part of trading. A trader who is surprised by losses and market risks has not fully educated themselves and should reconsider their trading strategy. However, by being aware of risks and losses, you will be more likely to succeed than if you only focus on profits.
Margin calls avoidance
Losses and risks are inevitable when trading, but risks can be mitigated, and losses managed. With good education and risk management, it is possible to trade with a leveraged Forex or CFD account, while avoiding the threat of margin calls.