Margin Call
A margin call is a critical notification alerting traders that the equity in their trading account has dropped below the required minimum margin, necessitating either the injection of additional funds or the liquidation of positions to meet the margin requirements. Originating from the traditional broker practice of calling clients, margin calls are now typically issued through email. This mechanism serves as a protective measure in leveraged trading, like forex, where traders must maintain both an initial deposit to open positions and a maintenance margin to keep them open. Failure to uphold the maintenance margin due to trading losses triggers a margin call, indicating the need to restore account balance to prevent forced position closures.
Understanding Margin Requirements
Margin trading involves two key components: the initial deposit required to open a position and the maintenance margin required to keep it open. The latter is crucial for ongoing trading; falling below this threshold triggers a margin call, signaling that the account no longer meets the minimum equity requirement.
Difference Between 'Margin Call Level' and 'Margin Call'
It's essential to distinguish between a 'Margin Call Level' and a 'Margin Call.' The former is a predetermined threshold that, when reached, initiates a margin call event. The margin call itself is the action taken by the broker, usually a notification to the trader, prompted when the account's margin level dips below the set margin call level.
Responding to a Margin Call
Upon receiving a margin call, traders have two options: deposit additional funds to meet the margin requirement or reduce open positions to lower the maintenance margin needed. Failure to take action can result in the broker forcibly closing positions to cover the margin shortfall, locking in any losses.