Margin Call – Why Does it Pop Up?
July 8th, 2008 Posted in FX Education
Believe it or not, Margin Call is your friend.
Let’s take a brief look at what margin is, and then we could better understand why the margin call is essential in our trading journey.
When a trader uses brokerage services in order to enter the foreign exchange market, he gets the opportunity to leverage his funds using a loan he receives from his forex company, called a Margin. By utilizing margin, traders are increasing their purchasing power so that they can own more lots without fully paying for it.
In ForexYard for example, a trader can leverage his funds up to 1:200, meaning that a trader who opened an account with the sum of $10,000 can open new positions up to the amount of $2,000,000 !
However, using such high leverage will expose you to harsh risks, and may rapidly end your investing experience. Always remember that having the opportunity to gain 200 times larger profits will necessarily endanger you with the risk of losing just as much.
After you decided what level of leverage you are planning to use in order to enjoy maximum profits with minimum risks, you can now understand why a margin call pops up.
ForexYard recognizes that its traders are using leverage, and that the foreign exchange market tends to greatly fluctuate. Therefore, there is a very important safety feature embedded in the system that prevents clients from losing more money than they have in the account. Should the account equity, meaning the total floating value of the account, fall below the margin requirement of approximately 20% of the used margin, the dealing desk will close all positions. This protects the trader from losing more than the funds he deposited into the trading account.
Margin calls pops up when the traders’ equity reaches dangerous lows, in order to protect them from entering a negative balance. The margin call allows traders to peacefully trade without concerns on getting into debts.
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Tags: forex broker, Forex Leverage, Margin Call
