What Is a Margin Call? (And How to Avoid It)

A margin call happens when your account doesn't have enough funds to maintain an open leveraged trade. When you trade with leverage, you only need a small portion of the trade's total value as a margin (for example, 1% with 100:1 leverage).

If the market moves against you and your losses bring your account balance close to the required margin, a margin call is triggered. This means you need to either deposit more money, reduce your position size, or the broker may close your trade to prevent further losses. It's a way for brokers to limit their risk.

What Is Margin and Leverage?

Margin calls have a bit of a infamous status among traders - at least traders who risk way more than they should! It’s pretty common to use leverage and margin accounts, particularly when it comes to forex as the trade sizes can be pretty big.

For example, if you wanted to open a 1 lot trade on EUR/USD, without leverage you would need 100,000 euros! Most retail traders don’t have that kind of money upfront to open a trade in the first place. However, if we have access to leverage, such as 100 to 1, that means we’d only need 1000 euros in our account to open that 1 lot trade. 

That 1000 euros would be known as the margin, and it’s the minimum amount of money we need to keep in our trading account to keep that trade open, at least at the full position size. If we reduce the position size, the margin will also reduce.

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But what happens if the trade enters a loss, and the account value comes close to the margin? This is the margin call.

Using that same example again, let’s say we want to open a 1 lot trade on EUR/USD, and we need 1000 euros in margin. If we have 1,500 in the account, that means we have enough to open the trade, and a bit extra so the price can enter a loss without hitting a margin call. 

However, If the trade goes into a loss of 500, you’ll be within the margin requirement to keep the trade open, and this would result in a margin call. 

At this point you have three options: 

1. You could increase your equity in the account by depositing more money. There are situations where this would be viable, but as a beginner, for the most part this would be a mistake and likely to result in a much bigger loss overall. 
2. Reduce the position size. You can do this by scaling out of the trade, but this would have to be a proactive decision before the price reaches the margin call.
3. Completely close the trade. However, this may not actually be your decision if you’ve already hit the margin call. The broker will close it for you anyway, and this typically happens at around 10% of the margin requirement. 

The reason brokers use a margin call is to protect themselves from the risk of loss on the loan made to you for the leverage. If you fail to meet the margin call, the broker or lender may close some or all of the positions in the account to avoid further losses.

However, you can take actions to reduce the risk of margin calls in the first place by making sure your risk limits are reasonable. We typically recommend a maximum of 2% on any single trade. That’s going to be the main reason most beginners are getting margin called, too much risk!

Although we can reduce the risk of a margin call, the risk is never 0%. Margin calls can be triggered by market movements beyond your control. That’s why we recommend not keeping all your trading funds in with your broker. Keep enough with your broker to cover the margin, and the rest in a safer bank account. That way you still have money to trade if something goes terribly wrong!