What Is a Margin Call and How Do You Avoid One?

What is a margin call? It is a warning that your account no longer has enough equity to support the positions you hold, usually because the market moved against you. If the account keeps falling, positions can be closed automatically. Knowing the numbers behind it, and how to stay well clear, is basic survival for any leveraged trader.

What is a margin call in plain English?

When you open a leveraged trade, part of your balance is set aside as margin, a deposit that keeps the position open. The rest of your account is called free margin. As prices move, your open profit or loss changes your equity, which is balance plus floating profit or minus floating loss.

A margin call happens when equity falls too close to the margin needed to hold your positions. The platform flags it so you can add money or reduce your positions. If the account falls further, to the stop-out level, trades are closed to protect against negative balances. The exact levels are set in your account terms, so check them before you trade.

The numbers: margin level

Platforms show a figure called margin level, calculated like this:

• Margin level = equity ÷ used margin × 100

If your equity is $1,000 and used margin is $200, margin level is 500%. That is comfortable. If equity drops to $300 with the same used margin, margin level is 150%, and the warning light is on. The lower the percentage, the closer you are to trouble.

You can estimate used margin beforehand with the margin calculator. It depends on the pair, the position size and the leverage, which can reach 1:500 on DMA Capitals accounts. You can read more in Leverage in Forex.

A worked example

Take a $1,000 account and buy one standard lot of EUR/USD at 1.1000. These are illustrative figures. A standard lot is worth about $110,000, so at 1:500 the margin is about $220. Each pip is worth $10.

1. Start: balance $1,000, used margin $220, equity $1,000, margin level about 455%
2. The price falls 30 pips to 1.0970: floating loss $300, equity $700, margin level about 318%
3. The price falls to 1.0930, a 70 pip loss: floating loss $700, equity $300, margin level about 136%
4. The price falls toward 1.0900: equity approaches the margin needed, and the account is near stop-out

A move of 100 pips, which is an ordinary day for many pairs, has consumed almost the entire account. The trade did not need to be "wrong" for long. It was simply too large for the account. Compare that with 0.10 lot, where the same fall costs $100 and margin level stays high.

A margin call is rarely caused by bad luck. It is usually caused by a position that was too large.

How to avoid a margin call

1. Size small. Risk about 1% of the account per trade. Our guide to lot size in forex shows how.
2. Use a stop loss. A stop closes the trade at a loss you chose, long before the platform does it for you. See How to Set a Stop Loss.
3. Watch total exposure. Several open trades share one pool of margin, and trades in correlated pairs can all lose together.
4. Keep free margin high. Aim to use only a small share of your equity as margin.
5. Do not add to losers. Averaging down uses more margin exactly when the account has less.

The risk calculator helps with the first two, and the risk warning sets out the wider risks.

What if you get a margin call?

You have three options. You can deposit more money, close part of a position to free margin, or close the whole trade. Adding money to a losing trade is the option beginners reach for, and it is often the worst, because it increases the amount you can lose. Closing a portion and accepting a smaller loss is usually calmer.

Also be aware that fast markets, such as around major data releases, can move prices through levels quickly. Check the economic calendar and consider reducing size before big events.

What to do next

Open a demo account, place a deliberately oversized trade, and watch margin level fall as the price moves. It is a safe way to see the effect with virtual money. Then repeat with a sensible size and compare. Leveraged trading carries a high risk of loss.