The Forex market is very volatile and the volumes are so high that are difficult to be imagined. Although you can earn a few thousand dollars per day, you can also lose all your money in a few seconds. How does this happen? Who is responsible for this? How to avoid such trouble? Let’s talk today about the margin call and the stop loss.
Margin call is included in the black list of things that you must avoid at any cost when trading in the Forex market. Your risk plan should include measures to prevent actions that can lead to margin call.
The concept of margin
While banks, organizations and corporations have millions of dollars at their disposal for trading in financial markets, an ordinary individual trader does not even have tens of thousands to trade. Usually trading in the Forex market attracts people who are not very rich, who can afford to deposit only a few thousand, or even hundreds of dollars. For them, the Forex market is the only way to financial freedom and independence.
Therefore, in order for us to have the opportunity to trade in financial markets, Forex brokers provide us with a tool called margin.
In simple words, the broker provides us with a short-term loan (only for the duration of the transaction, which cannot be withdrawn), while the investor has only 1% of the amount that he trades on the deposit. It sounds, of course, great, but the margin has the reverse side of the coin, and it is not so beautiful.
Margin call and Stop-out
In order to avoid negative balance on the account brokers introduced the so called margin call and stop out. Once your trading margin approaches zero, all trades are automatically closed by the broker, and if you have losing trades, you automatically lose almost all your money.
The margin call is simply a notification in the platform that your margin level is approaching dangerous levels (this usually happens at 50% margin level).
The stop-out occurs when you’re your margin level drops to 20%. At this point the broker starts automatically closing all trades one by one starting from the most losing one.
If this happens, you do not only lose money, but also lose confidence in yourself and your trade. Often after such event, a trader takes long time to recover and return to trading. Some traders do not return at all.
How to avoid margin calls and stop-outs
1. Use a trusted broker
Do not rush when choosing a broker, a dishonest broker can widen spreads in order for you to reach margin call or stop out..
2. Always have enough funds in your trading account
Never invest your savings in financial markets, trade only with disposable income, that is, those that you can afford to lose. But, despite all of the above, it is important that your deposit is large enough in order not to receive margin call every 5 minutes. To do this, you need to calculate the position size correctly and not use more than 5% of your capital in one transaction.
3. Concentrate on the market
Always watch the market. Sometimes it happens that a profitable situation turns into a catastrophe. It is important to respond to the situation on time in order to avoid unwanted margin calls.
4. Do not be greedy!
Trading in the Forex market is associated with millions of dollars, for many it is an irresistible temptation. Remember this symptom!