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What is a margin call and how do you avoid it?
Margin call occurs when your account's equity drops below the required maintenance margin. Learn why understanding margin call is crucial for managing risk in leveraged trading.
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What is a margin call?
A margin call is the term used to refer to when the equity (ie the cash balance plus or minus any profits or losses) in your account drops below a certain threshold (called the ‘margin requirement’).
Margin calls serve as a risk management tool, ensuring that you maintain enough funds in your account to cover potential losses. When a margin call is issued, you should act quickly to either add funds or reduce your positions to meet the minimum margin requirements.
Margin call example
Let's say the margin call level is set at 100%. In most cases, you’ll get a warning notification if your account equity drops below 100% of the required margin. A margin level at 100% is when your equity is equal to your used margin. This happens when you have open positions where running losses continue to increase.
Aside from getting a notification, your trading will also be affected. If your account's equity is less than 100% of the margin required, you won’t be able to open any new positions – you can only close existing positions.
Let's say you have $2,500 in your account and you open a EUR/USD position with 1 mini lot (10,000 units) that has a $600 required margin. Since you only have one position open, used margin will also be $600 (same as required margin).
Imagine the trade turns against you you're down 1,910 pips. At $1/pip for a mini lot of EUR/USD, this means you have a running loss of $1,910.
This means your equity is now $590 ($2,500 initial balance - $1,910 running loss).
Your margin level is now: ($590 / $600) x 100% = 98.33%. So, you’re on margin call.
Remember, once the margin level reaches 100%, you won’t be able to open any new positions – unless:
- The market reverses and goes in your favour
- Your equity becomes more than your used margin
If the first doesn't happen, the second is only possible if you close out existing positions to free up margin or if you deposit more funds into your account.
When does a margin call happen?
A margin call can happen at any time when your account's equity falls below the maintenance margin requirement. This can be caused by several factors, such as:
- Significant market movements against your open positions: sudden price swings can quickly erode your account equity, especially if you're heavily leveraged
- Insufficient funds to cover losses: if you don't have enough free margin in your account to sustain ongoing losses, it could trigger a margin call
- Increase in margin requirements: sometimes, we may change margin requirements due to increased market volatility or regulatory changes
- Withdrawal of funds that reduces your account equity: taking money out of your account can lower your equity and potentially trigger a margin call if you have open positions
It's crucial to understand the concept of maintenance margin, which is the minimum amount of equity you must maintain in your contract for difference (CFD) trading account.
You should always be aware of your account's margin level and the proximity to potential margin calls. Our trading platform offers real-time margin monitoring to help you stay informed about your account status.
Your positions are at risk of automatic closure in a margin call. Email notifications will usually be sent when you’re on margin call, but we aren’t under any obligation to inform you that you’re on margin call.
Margin call notifications
When you’re on margin call, we aim to notify you about this, but we aren’t under any obligation to do so. Any attempt to contact you is as a courtesy – we cannot guarantee that we’ll contact you. It’s your responsibility to ensure that there are enough funds in your account at all times to cover your margin obligations.
If we do let you know that you’re on margin call, we’d typically reach out via email. It’s important to note that markets can move fast, which may mean that we’re unable to contact you before your positions get closed.
There are two points at which we’ll aim to notify you via email that you’re on margin call.
When your equity drops below:
- 99% of your margin
- 75% of your margin
If your equity level moves below 75% multiple times on a single margin call, we won’t aim to send you multiple notifications.
Automatic closing of positions
When a position is in a loss and your equity drops to below 50% of your margin, we’ll start closing positions to bring your account back to a margin level of 100% (or higher, at the discretion of our Dealing team). Because of how fast markets can move, we might be unable to contact you before your positions get closed.
You can use our collateral service if you have a Pro account. Our collateral service enables you to use your holdings in your share trading account to cover the margin requirements of your CFD trading account.*
Even though we have negative balance protection available for retail traders, it’s always important to use tools like stop-losses or guaranteed stops to manage your risk.
How to satisfy a margin call
When faced with a margin call in your CFD account with us, you have a few choices.
- Deposit cash: add money to your account. This is often the quickest and most straightforward way to meet the margin call. It immediately increases your account equity without affecting your existing positions
- Close existing positions: this reduces your margin requirement by decreasing your overall position size. However, be aware that this may result in realising losses if you're selling positions at a loss
It's important to act quickly when you receive a margin call. Failure to satisfy the margin call within the given period may result in us closing your positions, which could lead to substantial losses.
How to avoid a margin call
To minimise the risk of receiving a margin call, consider these strategies:
- Create a cash cushion: maintain extra funds in your account beyond the minimum margin requirement. This provides a buffer against market fluctuations and reduces the likelihood of triggering a margin call. A good rule of thumb is to keep your account equity at least 30% above the maintenance margin requirement
- Build a well-diversified portfolio: spread your risk across different asset classes and sectors. Diversification can help mitigate the impact of adverse price movements in any single security or market sector, lowering the chances of a significant drop in your account equity
- Track your account closely: regularly monitor your positions, account balance and margin levels. We offer alerts to help you keep track of your account status. Set up notifications for when your margin level approaches critical thresholds
- Use stop-loss orders: implement a stop-loss order to automatically close a position at a certain pre-determined price if the market moves against you, limiting potential losses. While stop-loss orders don't guarantee execution at the exact price you set, they can help manage risk in volatile markets and prevent small losses from turning into larger ones that could trigger a margin call. You can use a guaranteed stop – which you’ll pay a premium for if it’s triggered – to ensure that your position will be closed out at your selected level in cases of slippage
Senior technical analyst Axel Rudolph gives his view on how to avoid a margin call
One effective way to avoid margin calls is to ensure you have enough capital in your account. This involves careful risk management and position sizing. Let's explore how you can manage your risk effectively to maintain adequate capital and avoid potential margin calls.
You should ideally limit your risk to 1-3% of your total trading capital per position. Exceeding this threshold significantly increases the risk of depleting your trading capital over time. For instance, if a position is leveraged to the point where the potential loss could be 50% of total trading capital, just two consecutive losses could wipe out your entire account.
Even if only one highly leveraged trade results in a loss, you’d need to achieve a 100% profit just to recover your initial position. This scenario underscores the importance of prudent risk management in CFD trading.
Many traders underestimate the likelihood of consecutive losing trades, especially as the number of executed trades increases. If you, for example, use a normal probability distribution: with a 50% win rate over 100 trades, there's a 100% chance of experiencing five consecutive losing trades, a 10% chance of nine consecutive losses, and a 1% chance of twelve consecutive losses.
The impact of position sizing on trading capital
If you had a 50% win rate, risking 10% of your total trading capital per trade you’d (at best) lose 50% of your capital over 100 trades (five consecutive 10% losses). At worst, you could face the risk of ruin, potentially losing all your trading capital (more than ten consecutive 10% losses).
Conversely, when risking only 1% per trade, a ten-trade losing streak would result in a total 10% loss. At 3% risk per trade, the same streak would lead to a 30% loss of total trading capital. While disappointing, such losses would still leave 70-90% of the trading capital available for potential recovery.
This situation contrasts sharply with risking 10% per trade, where ten consecutive losses would completely deplete your trading account. It's crucial to remember that recovering from significant losses becomes increasingly difficult, as larger percentage gains are required to offset percentage losses.
You can limit your potential loss to 1-3% of your total trading capital through various methods. These include reducing leverage per trade, implementing stop-loss orders on positions, or employing hedging strategies.
FAQs
What happens if you can't meet a margin call?
If you can't meet a margin call, we may close some or all of your positions to bring your account back to the required margin level. This process, often called a ‘stop out’, can result in significant losses.
How do you survive a margin call?
To survive a margin call, quickly deposit funds or close losing positions. Acting quickly can help you navigate this challenging situation.
Do you lose all your money on margin call?
No, you don't necessarily lose all your money on a margin call, but you may lose a significant portion if you can't meet the call. You could even lose more than the amount you deposited. The exact amount depends on market conditions and how quickly you respond to the margin call.
What if I have activated collateral in my share trading account?
To activate collateral in your share trading account, you must have a Pro account with us. If you’re a Level 1 Pro client and you have collateral enabled, you won’t get access to negative balance protection. So, it’s important to use tools like guaranteed stops to ensure that your positions are closed at the level you specify. You’ll pay a premium to use a guaranteed stop, but only if it’s triggered.*
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Get a breakdown of the costs and charges you’ll pay when trading CFDs with us.
* You’ll only be able to use our collateral service if you have qualified for an IG Pro account. If you’re using the contents of a share portfolio as collateral to cover your margin requirements in your leveraged account, we can allow your CFD account equity to drop to 50% of your collateral level before we start closing positions. We can't guarantee that level, though, so you may find positions are closed before or after your equity drops to 50%.
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- CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You do not own or have any interest in the underlying asset. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Please consider the Margin Trading Product Disclosure Statement (PDS), Risk Disclosure Notice and Target Market Determination before entering into any CFD transaction with us.
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