Sometimes a trader might end up keeping losing positions that put him on the brink of a negative forex account. To tide over this crisis, sometimes all his open positions are closed. It prevents him from accruing any negative balance and subsequent forex debt. Because it is a call at the margins, it is called a margin call. Moreover, it is a cushion to a trader so it is also termed as airbag trading (remember the airbags used in hatchbacks and SUV’s)
Now, when the broker or a forex exchange knocks for a margin call, the trader either has to increase the margin or the leverage or put a close on his held positions. The former obviously takes him upwards thereby sheltering him from playing at the brink. A trade can look to do this by buying long securities and selling the short ones. If there is no action from the side of the trader, the broker itself does the needful by making the margin call and closing position.
Ask your broker to give you a high leverage on small units. If he does not agree then do not enter into a trade as you will be registered with a margin call soon otherwise. The idea is to play with a big leverage as you will be stopped out. With a low leverage, it becomes difficult for a trader to sustain huge drifts. So in the final say, all of you having small trading accounts, trading with high leverage is a sure shot way to avoid margin calls.
Today, with high leverages, the chance of going turtle has also increased for the trader. To safeguard a trader against this, dealing desk closes all the held positions in the event of account equity falling below 20 percent of the used margins.
Now, a margined account is nothing but a highly leveraged account used for buying currencies through cash or collateral or both. A trader can look to use stop loss orders or at any rate keep the account flushed with funds to avoid margin calls. This is important as margin calls tend to be a doom’s call for speculating traders who feel that their equities or currencies can see the light of the day even after reverses. Once a position is closed, there is no chance of any reversal affecting a trader positively.
Margin call does hurt. Let’s suppose you have a leverage of 100:1 against your account. This would mean that for a $100000 trade you have a $1000 margin. Now, if your account is showing $900 erosion, the margin is most likely to get eroded. Now, while getting the next trade in, you might have to wait and get your margins raised or renewed. For forgetful traders, this might mean loss of a trade. Putting conservative stop losses are a better idea so that the margin calls do not come to you.
During the close of the market, the volatility increases quite a bit. It is here that the reduced leverage comes into the picture for over-the-weekend trading.