Preventing Margin Calls: What You Need to Know
A margin call is one of the most frightening words in trading. It means that your account does not have enough resources to cover your open positions. Here’s how to prevent it.
What Is Margin?
Margin is the amount that your broker holds as collateral for your open positions. With leverage, you can trade more than you have in cash, but you must always have sufficient margin.
What Is a Margin Call?
When your losses accumulate to the point where your margin is insufficient, your broker sends a margin call. This means: deposit more money or your positions will be closed.
How It Works
Suppose you have €1,000 and you use 10x leverage. You can then open positions worth €10,000. Your broker holds €1,000 as margin. If your losses climb to €900, you only have €100 margin left. With further declines, your broker closes your positions.
Preventing Margin Calls
1. Limit Your Leverage
Higher leverage means more risk. Never use more leverage than you can handle. For beginners, 2x to 5x is more than sufficient.
2. Always Use a Stop Loss
A stop loss limits your loss on every trade. This way, your margin will never suddenly deplete.
3. Manage Your Position Size
Risk no more than 1-2% of your account per trade. This means you would need to have many consecutive losing trades to receive a margin call.
4. Monitor Your Positions
Regularly check your open positions. Don’t wait for your broker to call you.
5. Have a Sufficient Buffer
Ensure that you always have enough free margin. Do not trade with your entire account.
Conclusion
A margin call can be prevented with discipline and knowledge. Understand leverage, use a stop loss, and manage your risk. Then you will never have to worry about a margin call.
