What is a Margin Call in Forex?

If you're a forex trader or aspiring to become one, understanding what a margin call is goes hand in hand with learning about leverage. In forex trading, leverage allows traders to control positions that are much larger than the amount they deposit in their trading account. The funds deposited act as margin—essentially collateral to protect the broker against potential losses from the trader's positions.

Leverage enables forex traders to take on significantly larger trades with just a fraction of the capital they would normally need. While this can magnify potential profits, it also increases the risk of substantial losses. A margin call occurs when the trader’s account no longer has enough equity to support their leveraged positions, prompting the broker to request additional funds or close positions to limit losses.

In this article, we'll explore what a margin call in forex is, how to avoid one, and how to use margin effectively to manage both risks and rewards.

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What is Margin?

Margin is the minimum amount of money or collateral you need to deposit in your trading account to hold a particular leveraged forex position.

When trading in a margin account, your trading platform will generally show you the funds or equity you deposited into the account. It will also usually show a “used margin” column that refers to the amount of margin you presently have tied up with open trading positions, as well as a “usable margin” or “margin available” column that shows how much additional margin you have available to take new trading positions with.

The available margin in your trading account will equal the funds deposited in your account minus the amount of margin applied as security to hold any positions you may have outstanding. If no positions are outstanding, then the amount of available margin would be equal to the funds deposited in your account.

Once you’ve established a leveraged forex position, the amount of usable margin in your trading account would decline by the amount of margin required by your broker for you to maintain the position.

How Does a Margin Call Work?

A margin call happens when your trading account doesn’t have enough funds to maintain your open positions. Your broker will ask you to deposit more money or they may close your positions to prevent further losses.

Margin calls usually occur when your positions lose value due to market movements, or if the broker reduces leverage on the asset you're trading. To avoid a margin call, make sure your account equity stays above the used margin by managing your positions and using stop-loss orders effectively.

Margin Call Example

For example, if the required margin of your currency trading positions had increased to $11,000 while your account equity remains steady at $10,000, you have a negative -$1,000 margin balance. You might then get a forex margin call to deposit an additional $1,000 into your FX account, although many online forex brokers will just close out all of your trading positions if this negative margin balance situation occurs.

Keep in mind that a margin call will require you to quickly deposit the difference between your account equity and the margin required by your positions or have your positions closed by your broker.

You might receive a margin call or experience an automatic closeout of your positions whenever your used margin exceeds the available equity in your trading account.

Understanding Margin Calls

Let's dive deeper into how margin calls in forex work.

Do You Lose Money?

In most situations, receiving a margin call would imply that you either have too many open positions or that one or more of your open positions are losing enough money to deplete your trading account to the point of exhaustion.

Margin calls typically occur when your open positions have lost money overall, so you may indeed lose money when faced with a margin call. This factor is especially problematic when you choose to ignore the margin call so your positions get closed out by your broker at a net loss to you.

Whether you lose money on a particular margin call, however, will depend in large part on how you respond to the call and what happens afterward. When faced with a margin call, you can choose to meet it by depositing the required amount of funds, or you can liquidate all or a part of your position to meet the margin call.

If you do meet the margin call by depositing the required additional funds into your trading account, you might still make money on the position if the market then trades in your favor afterward. Conversely, if you meet the margin call and the market value continues to trade against your position, you would eventually just get another margin call and lose even more money.

How Long Can You Stay in a Margin Call?

A margin call is generally an urgent request for funds from your broker, so you cannot stay in a margin call situation for very long. Make sure you check with your forex broker to see if they even provide margin calls and what their margin call policy is, including how long you have to respond once you receive a margin call.

Some forex brokers will give a margin call instructing the receiving trader to fund their account quickly with the required amount of money or liquidate their losing positions. Still, many online forex brokers do not even provide the courtesy of a margin call before automatically closing out all of the open positions in your forex account once your usable margin heads toward or goes into negative territory.

Once your usable margin hits or approaches the zero level, if your positions are not immediately liquidated by your broker, then you have very little time to add more funds to the account or liquidate positions yourself to satisfy a margin call you have received from your forex broker.

Some brokers that provide margin calls will also notify traders when their account gets near the point where they will receive a margin call using margin call levels. This process lets you take action to rectify a funding issue with your trading account voluntarily before a margin call requires it.

What is a Safe Margin Level to Trade Forex?

A safe margin level to use when trading forex will generally depend on an individual trader’s psychological profile and risk tolerance that will influence the risk management measures included in their trading plan.

A low margin rate implies a higher leverage ratio and hence that more risk can be taken for a given margin deposit. In contrast, a high margin rate implies a lower leverage ratio and that less risk can be taken given a certain deposit.

Some jurisdictions prevent the use of excessively low margin rates among retail forex traders by legally limiting the leverage ratios available at online forex brokers servicing clients in their locales to relatively safe levels.

For example, U.S. forex traders are limited to a 50:1 leverage ratio and European retail forex traders can use a leverage ratio of up to 30:1. In contrast, some offshore online forex brokers allow their clients to use much higher leverage ratios of up to 1,000:1.

When operating in a less-regulated jurisdiction that does not have a capped leverage ratio, many forex traders might feel comfortable with the risk level involved in using a 0.5% margin rate that implies a leverage ratio of 200:1, while more conservative traders might feel safer using a 1% margin rate or 100:1 leverage ratio.

Can I Trade Forex Without Margin?

You can definitely trade forex without using margin. In fact, transactions occurring in the Interbank forex market are generally done based on credit lines extended between market makers and their counterparties instead of using margin accounts.

Such counterparties can include high net-worth individuals who financial institutions consider sufficiently creditworthy to extend them lines of credit to make forex transactions with. Most retail forex traders are not sufficiently good credit risks to have access to this sort of privilege, so they instead need to use margin trading accounts opened with online forex brokers.

While these smaller traders can theoretically avoid using leverage when making forex transactions, they would probably not be able to make a worthwhile profit doing so — even if their market view turns out to be correct — given the rather low volatility levels commonly seen in the forex market.

Accordingly, the main reason that most retail forex traders use leverage and trade on margin is that very few significant profits can be made trading in small amounts of currency without a margin account.

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How to Avoid Getting a Margin Call

The best way to avoid getting a margin call is to trade carefully and incorporate prudent money management techniques into your trading plan. Trading techniques such as position sizing appropriately relative to the size of your account and trading with stop-loss orders can significantly reduce your risk of getting a margin call.

Keep in mind that many online forex brokers will close out or liquidate some or all of your positions immediately once your account reaches a stop-out level that is usually set at the point where your equity falls below a specific percent of your used margin.

An automatic liquidation typically occurs if your margin level falls to the percent level specified by your broker. It then results in one or all of your open positions being automatically liquidated by your broker.

Online brokers often insist on the right to perform this type of unilateral liquidation in their terms and conditions because they require sufficient collateral to allow a trader to hold open positions in case the trader loses money and refuses to deposit more funds to cover their losses.

An online broker’s typical policy is that if a retail trader’s account does not have enough margin to support its open positions, then their positions should be closed out automatically to prevent further losses for the trader and the broker instead of wasting time issuing a margin call and waiting for a response.

What You Can Do if You Get a Margin Call

If your account’s equity has been depleted to the point of getting a margin call, you will first need to respond quickly and prudently to the loss situation you are facing. You may also want to re-evaluate your trading plan and determine what steps you can take to revise your plan to avoid getting another margin call.

As Wall Street legend and day trading pioneer Jesse Livermore once wrote, “Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep the money for another day.” Overall, that advice makes a lot of sense.

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