What exactly is “Margin Call Level” or “Margin Call”?
The Margin Call Level in forex trading occurs when the Margin Level reaches a certain level or threshold. When this level is reached, you run the risk of having some or all of your positions FORCED CLOSED (or “liquidated”).
The “metric” is the Margin Level, and the “Margin Call Level” is a specific “value” of the metric (which is the Margin Level).
Yes, it is awkward. But don’t blame us because we don’t name these things. Some forex brokers, for example, have a Margin Call Level of 100%.
In the preceding example above, if your account’s Margin Level goes to 100% or lower, a “Margin Call” will occur.
What is a Margin Call?
When your broker tells you that your Margin Level has gone below the required minimum level (the “Margin Call Level”), this is referred to as a Margin Call.
This notification used to be a phone call, but it’s now more likely to be an email or text message.
Regardless matter how you are notified, the feeling isn’t good.
Margin calls occur when your floating losses exceed your Used Margin.
That is, your equity is less than your used margin (since floating losses reduce your Equity).
Margin Call Level vs Margin Call
A “Margin Call Level” is a limit set by your broker that will result in a “Margin Call.” It represents a specified percentage (%) of the Margin Level. For instance, when the Margin Level is set to 100%.
A “Margin Call” is a type of event. When a Margin Call happens, your broker will take action. The action is usually “to send a notification.” This event occurs only when the Margin Level goes below a specified threshold. This is the “Margin Call Level.”
Consider boiling water. Water generally boils when the temperature reaches 100° C.
Temperature is similar to the Margin Level. Temperatures can vary and can be any number such as 0° C, 47° C, 89° C, and so on.
The Margin Call Level is equivalent to a specific temperature of 100° C.
A Margin Call is similar to water boiling, which occurs when a liquid turns into a vapor.
Example: Margin Call Level at 100%
Assume your forex broker’s Margin Call Level is set to 100%.
This means that if your Margin Level hits 100%, your trading platform will send you a warning signal.
Margin Call Level = Margin Level @ 100%
In addition to receiving a notification, your trade will be impacted.
If your account’s Margin Level hits 100%, you will be unable to create new positions and will only be allowed to close existing ones.
A Margin Call Level of 100% indicates that your Equity equals or is less than your Used Margin.
This happens because you have open positions with increasing floating losses.
Assume you have a $1,000 account and open a EUR/USD position with 1 mini lot (10,000 units) and a required margin of $200.
Because you only have one open position, your Used Margin will likewise be $200. (same as Required Margin).
You still stink at trading at this point, so your trade immediately starts losing money. It’s losing a lot of money. (You’re a terrible trader.)
You have now lost 800 pips.
At $1/pip, this equates to a $800 floating loss!
This indicates your Equity is now $200.
Equity = Balance + Floating P/L $200 = $1000 - $800 Your Margin Level is now 100%.
Margin Level = (Equity / Used Margin) x 100% 100% = ($200 / $200) x 100%
Once the Margin Level reaches 100%, you will be unable to open any new trades unless you do the following:
The market returns to your side.
Your equity has surpassed your used margin.
If #1 does not occur, then #2 is only conceivable if you:
More money should be deposited into your account.
Existing posts should be filled.
The account will be unable to open any new positions until the Margin Level exceeds 100%.
What if your bad trade continues to go against you?
If this occurs, the broker will be required to close your position once your Margin Level falls to ANOTHER certain level.
The other level is known as the Stop Out Level, and it changes depending on the broker.
If a Margin Call event is analogous to water boiling, a Stop Out event is analogous to being burned by the boiling water.
Next Lesson: What is a Stop Out Level?
