What is a margin call and how do you avoid it?

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:

1. The market reverses and goes in your favour
2. 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.

How to avoid a margin call

To minimise the risk of receiving a margin call, consider these strategies:

1. 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
2. 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
3. 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
4. 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