Using margin to trade can be a great way to make your money work harder for you, as you can make profits that are usually only possible with a much larger investment. However, with this benefit also comes the risk of suffering greater losses if the trade moves against you. You may also end up losing more than what you have in your account.
In order to prevent this from happening, we have a margin policy in place whereby your positions can be closed by us if you do not have sufficient funds to keep them open.
You enter a margin call when your maintenance margin has been used up and you now have a negative balance of available funds in your account. When your margin deposits go below -50%, we may cut your positions to prevent you from incurring more losses. This is when a margin call happens.
Example of a Margin Call situation
You have a cash balance of USD 1,500 in your account with a leverage of 1:100, or a margin of 1%. You place a trade to buy 1 standard contract of EUR/USD, at a Ask Price of 1.23840. The initial margin requirement for this contract is as follows:
Number of contracts * Number of pips * Value per pip * Margin %
1 standard contract * 12384 pips * USD 10/pip * 1% = USD 1,238.40
You now have a maintenance margin of USD (1,500 – 1,238.40) = USD 261.6 left.
As the value of each pip is USD 10, your maintenance margin allows you to only have room for a drop of 26.1 points before you enter a negative balance. If your available funds left drops to -50%, you will be automatically cut out. The -50% level takes reference from your cash balance of USD 1,500. Hence, a margin call happens when your available funds on your account falls to –USD 450, which is essentially another 45 pips.
Hence, you can afford the EUR/USD to fall a total of 71.1 pips before your positions are automatically cut.