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Forex Margin Calls Are a Good Thing

Forex Margin Calls Are a Good Thing?

Getting a margin call is not usually a pleasant experience. Traditionally, the word “dreaded” has been the favorite adjective of the financial press regarding margin calls. As in: “During this period, Mr. Madoff began to fear the dreaded margin call…”

And then the story ends in utter disaster.

In the forex trade markets, margin calls are not necessarily a bad thing. In fact, a margin call in the forex markets can be a very, very good thing. Here’s how and why.

No Negative Equity Possible With Standard Forex Margin Call

Here are a few forex tips to consider. If you have a margin-enabled stock-trading account at a place like or, your personal assets can be in danger if you buy a stock and it completely tanks into the gutter.

You can go “negative” and end up owing the broker money. People do it all the time. And brokers will sue you to get that money.

Forex brokers don’t do that to you. They don’t need to. Because the forex markets are so liquid, forex brokers don’t need to fear being left “holding the bag” when an asset goes to zero, as can happen with a stock.

Therefore, it being so easy and instant to sell or buy a currency pair, a forex margin call simply means that your forex broker closes out all your open positions, selling at prevailing market rates and effectively forcing you out of your trade.

Once things get that dire, you probably should be out of that trade, anyways. But perhaps you’re unable to give up, thinking that “things have to turn around.” Forex brokers, unlike stock brokers, will not let you deceive yourself like that.

The intent of a forex margin call is the same as a stock market margin call—the broker is informing you: If you’re going to continue to lose money, you need to put up more collateral—but the mechanics of how a forex margin call make it, usually, a much more positive experience for a trader.

At the very least, you know that you won’t lose more money than you deposited into your trading account. The same can’t be said for trading stocks on margin.

Forex Margin Call Fine Print May Contain a Few Deal-Killers

The fact that forex broker margin calls are generally less brutal than stock broker margin calls does not mean that forex margin calls are not dangerous in their own right.

If you have a promising trade going, but are holding a position size that is too large relative to the collateral you have posted to your account, a forex margin call can kill your game in a second, knocking you out of that trade at a loss.

For example, we see many new traders start a forex account with a smaller amount of money—$2,500, for example. Such a trader will then calculate that, if his forex broker offers 100-1 leverage, he can control $250,000 worth of currency with no problem.

The trader then purchases two standard lots of GBP/USD. He doesn’t have much left in this account at that point but that’s no problem because he believes that GBP/USD is due for a rise.

And that is no problem—for the moment.

However, when GBP/USD drops even a few pips, such an overleveraged trader will see himself stopped out of the trade by a forex margin call.

Murphy’s Law will then dictate that the drop was a temporary one, and the GBP/USD resumed its steady upward climb mere seconds after taking that slight dip.

But our eager trader, by then, is out of the trade, involuntarily removed.

Avoiding scenarios like those is why you should always read the fine print on the margin policies of your forex broker(s). This is one section of the fine print that can really make a big impact on your forex trading strategies, as well as your results.

  1. What is the maximum leverage allowed by your broker?
  2. Will you receive a phone call before a margin call causes the broker to close out all your open positions, or is the closing out done automatically?
  3.  What informational tools are provided by your forex broker that allow you to know how close you are to a margin call at any given time? For instance, many sites will give you a “gas tank half full”-type margin thermometer.

Skim over large sections of that forex broker sign up mumbo jumbo, by all means, but stop and read through the margin policies if you plan on trading forex at this broker with any degree of regularity or longevity.

You won't need to dread forex margin calls if you're careful to avoid them in the first place.

Important Forex Information

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