Understanding Margin Calls and Margin Call Levels

In the world of forex trading, "Margin Call Level" or simply "Margin Call" refers to a critical point reached by the Margin Level.

When this predefined point is reached, you face the potential risk of having some or all of your positions forcibly closed, commonly referred to as "liquidated."

The Margin Level acts as the "metric," while the "Margin Call Level" represents a specific value within that metric (i.e., the Margin Level). Despite the somewhat confusing nomenclature, it's essential to grasp these concepts.

For instance, certain forex brokers set a Margin Call Level at 100%. In this scenario, if your Margin Level falls to 100% or lower, a "Margin Call" will be triggered.

Understanding a Margin Call

A Margin Call is the broker's notification to you that your Margin Level has fallen below the required minimum level (the "Margin Call Level"). While Margin Calls used to come in the form of phone calls, they are now typically delivered through email or text messages. Regardless of the medium, the feeling that accompanies a Margin Call isn't pleasant.

A Margin Call occurs when your floating losses surpass your Used Margin, indicating that your Equity has dipped below your Used Margin due to these losses.

It's important to differentiate between a "Margin Call Level" and a "Margin Call":

• A "Margin Call Level" is a specific threshold determined by your broker that can trigger a "Margin Call." It is expressed as a percentage (%) of the Margin Level, such as 100%.
  
  
• A "Margin Call" is an event that occurs when the Margin Level falls below a certain value, the "Margin Call Level." This event prompts the broker to take some form of action, usually by sending a notification.

Consider it akin to boiling water:

• The Margin Level is analogous to temperature, with various values like 0°C, 47°C, 89°C, etc.
• The Margin Call Level corresponds to a specific temperature, much like 100°C.
• A Margin Call is akin to the boiling point, the moment when a liquid transforms into vapor.

Example: Margin Call Level at 100%

Imagine your forex broker sets a Margin Call Level at 100%. This implies that your trading platform will send a warning notification when your Margin Level hits 100%.

Apart from the notification, your trading activities will also be impacted. When your account's Margin Level reaches 100%, you will be unable to initiate new positions; you can only close existing ones.

A Margin Call Level of 100% indicates that your Equity is equal to or less than your Used Margin. This transpires when you have open positions incurring escalating floating losses.

For instance, assume you start with a $1,000 account and open a EUR/USD position with 1 mini lot (10,000 units), requiring a $200 Required Margin. With only one position open, your Used Margin matches the Required Margin at $200.

Unfortunately, your trade immediately goes south, plunging 800 pips down, resulting in a floating loss of $800. Consequently, your Equity dwindles to $200.

• Equity = Balance + Floating P/L
• $200 = $1,000 - $800

At this juncture, your Margin Level stands at 100%.

• Margin Level = (Equity / Used Margin) x 100%
• 100% = ($200 / $200) x 100%

When the Margin Level hits 100%, you won't be able to open new positions unless:

• The market reverses in your favor.
• Your Equity surpasses your Used Margin.

If the first condition doesn't materialize, the second can only be achieved by:

• Depositing more funds into your account.
• Closing out existing positions.

Your account will remain unable to initiate new positions until the Margin Level exceeds 100%.

But what if your trade continues to deteriorate? If your Margin Level further drops to another predefined level, the broker will be compelled to close your position. This second level is known as the "Stop Out Level" and varies among brokers.

If a Margin Call event is analogous to water boiling, a Stop Out event equates to being scalded by the boiling water!