Traders tend to get confused between a Margin Call Level and a Margin Call.
Think about boiling water.
For water to normally boil, the temperature must reach 100° C.
Let’s say your forex broker has a Margin Call Level at 100%.
This means that your trading platform will send you a warning notification if your Margin Level reaches 100%.
Margin Call Level = Margin Level @ 100%
Aside from receiving a notification, your trading will also be affected.
If your account’s Margin Level reaches 100%, you will NOT be able to open any new positions, you can only close existing positions.
A Margin Call Level at 100% means that your equity is equal to or lower than your Used Margin.
This occurs because you have open positions whose floating losses continue to INCREASE.
Let’s say you have a $1,000 account and you open a EUR/USD position with 1 mini lot (10,000 units) that has a $200 Required Margin.
Since you only have one position open, Used Margin will also be $200 (same as Required Margin).
At this point, you still suck at trading so right away, your trade quickly starts losing.
It’s losing big time. (You really suck at trading.)
You’re now down 800 pips.
At $1/pip, this means you have a floating loss of $800!
This means your Equity is now $200.
Equity = Balance + Floating P/L $200 = $1000 - $800
Your Margin Level is now 100%.
Margin Level = (Equity / Used Margin) x 100% 100% = ($200 / $200) x 100%
Once the Margin Level reaches 100%, you will NOT be able to open any new positions unless:
If #1 doesn’t happen, #2 is only possible if you:
The account will be unable to open any new positions until the Margin Level increases to a level above 100%.
What happens if your sucky trade continues to go against you?
If this happens, once your Margin Level falls further to ANOTHER specific level, then the broker will be forced to close your position.
The other specific level is known as the Stop Out Level and varies by broker.
If a Margin Call event is the equivalent of water boiling, a Stop Out event is the equivalent of being burned by the boiling water!
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