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

What is a margin call?

A margin call is a request from your broker – ie us – to deposit extra funds into your account when the value of your positions falls below a certain threshold. This happens when the equity in your margin account drops below the maintenance margin requirement set by us.

Margin calls serve as a risk management tool, ensuring that you maintain enough funds 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%. This means that your you’ll get a warning notification if your margin level reaches 100%. A margin call Level at 100% is when your equity is equal to or lower than your used margin. This happens because you have open positions where floating losses continue to increase.

Aside from getting a notification, your trading will also be affected. If your account's margin level reaches 100%, you won’t be able to open any new positions – you can only close existing positions.

Let's say you have a £2,500 account and you open a EUR/GBP 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 market turns against you and your trade quickly starts losing. You're now down 235 pips. At approximately £0.85/pip for a mini lot of EUR/GBP, this means you have a floating loss of £200.

This means your equity is now £2,300 (£2,500 initial balance - £200 floating loss).

Your margin level is now: (£2,300 / £600) x 100% = 383.33%.

Remember, once the margin level reaches 100%, you won’t be able to open any new positions – unless:

1. The market reverses back 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 deposit more funds into your account or close out existing positions.

But what happens if your trade continues to go against you? Once your margin level falls further to another specific level (called the stop-out level), we’ll close your position.

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 stop-loss orders to automatically close positions if they move 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