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What is a Margin Call and When Do I Receive One?

leonmarshall
April 27, 2021
by Leon Marshall,

When trading CFDs markets can move against you very quickly during times of volatility. Because of that you may find that you are on margin call. This happens when you don’t have enough money in your account to cover any potential losses.

Margin call is like an alert or warning from your trading platform that the available capital in your account may soon no longer be enough to cover your open position(s).

You will always be required to meet a certain margin level. When your account funds dip below this level, you will be on margin call. Your position(s) will be automatically closed out if you do not fund your account.

If you fund your account to bring the level back over the requirement, you will no longer be on margin call and your position(s) will remain open.

Make sure that your trading plan takes into consideration the required margin you need to open or maintain for your market position(s).

Ideally, you should always budget for a general level of possible losses and keep your account funded before you reach the margin call level. This will help ensure your balance is healthy and reduce the possible risk of falling into margin call territory. The level at which you’ll receive a margin call for all of your positions is at 50%.

But What is a Margin?

When you trade online using a CFD trading account, you are trading on “margin”.

Margin refers to the amount of money or the size of the initial investment that you need in your account in order to open or maintain a position.

Remember, when you trade online, you’re also trading on leverage. This means that you only need a relatively small amount of initial investment to take a position with a large market exposure.

Leverage can help maximise your profits, but it can also amplify your losses. Understanding how leverage works and how to manage your risk is critical to successful, responsible trading.

Because trading on leverage magnifies profits and losses significantly, depending on the market you decide to trade, your margin requirement or level may vary by individual instrument.

Margin is always expressed as a percentage of your total position size. This will help you determine how much you need to fund in order to open or maintain a position.

Person's finger pointing at candlestick chart on a screen.

Why is margin call important?

Margin call is important as part of your trading plan. If you do not have the required margin available in your account, your trading platform may automatically close your position.

As a responsible trader, you should be actively managing your open positions. Be aware of the required margin level to maintain those positions at all times.

You can see your required margin level in the platform. And remember the higher the volatility in the wider market, the sooner you could get close to margin call if the market moves against you.

This is one of the reasons most serious traders are “active” on their accounts; they are regularly checking, managing and adjusting their market positions.

Risk management tools like Stop Losses and Guaranteed Stop Losses are also an excellent way to make sure you do not find yourself on margin call.

Stop Losses can be set up on every trade you make to automatically close out your position, should the market move against you and your losses reach a pre-determined level.

What happens if you ignore a margin call?

Never ignore a margin call, as they serve as specific, urgent alerts to notify traders of potential danger on their account. If this alert is heeded, it can help ensure your position remains open.

Just because you are on margin call, doesn’t mean you are in a hopeless position. Remember, you can fund your account immediately to ensure you have enough margin to cover your open positions. If you do not tend to the margin call, and the position goes in the opposite direction of which you wanted it to go, your position(s) could be closed out.

A better approach is to ensure you avoid margin call altogether. A strong CFD portfolio and a well-researched trading plan can help you achieve this.

Here are a few extra tips to help ensure you trade responsibly and maintain your margin level:

  • Manage risk intelligently.
    Make sure you know how to use risk management tools like Stop Loss Orders and Guaranteed Stop Loss Orders. These can ensure your position never drops below a pre-determined level.
  • Know your margin requirements.
    Check the margin requirements for whichever market(s) you want to trade before you open a position.
  • Actively manage your open positions.
    Remember, markets can move against you quickly. Actively managing and checking your open positions is crucial to understanding how successful your trades are.
  • Be extra careful in times of volatility.
    If the market is particularly volatile, make sure you know exactly how excess volatility is affecting your position. Keep up to date with data releases, market analysis and financial news to understand and anticipate potential market moving events.

Trading intelligently

Learn more about intelligently managing your risk in our Trading Education Hub, where we cover leverage and margin in more detail. Subscribe for our newsletter to make sure you regularly check in on our market news and analysis pages for the latest market insights and updates.

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