Margin Call Without Stop Out Level: A Scenario
Article 11 from 16
To start this scenario, let’s meet Sarah. He will be our “guinea pig” and will face margin call at level 100%, and of course without a separate stop out level. Poor Sarah 🙁
Let's Dig In!
Step 1: Account Set Up
Her name is Sarah. Sarah, a novice forex trader, starts a trading account with a $5,000 balance. She selects a broker with a leverage of 1:100, which allows her to control trades worth 100 times her account balance.
Step 2: Trade Execution
Sarah makes the decision to trade the GBP/USD currency pair. She feels the British pound would increase against the US dollar, so she initiates a long position by purchasing 10,000 GBP/USD at 1.4000.
Step 3: Margin Calculation
Sarah must consider the leverage and contract size when calculating the margin required for this deal. Her margin is computed as follows because her leverage is 1:100 and she is trading 10,000 units:
Margin = (Contract Size ÷ Leverage) = (10,000 ÷ 100) = $100
Step 4: Account Equity and Used Margin
The market moves against Sarah’s prediction as the trade progresses. The GBP/USD exchange rate begins to fall, causing unrealized losses on her stake. Sarah’s account equity eventually decreases to $100, which is equal to her utilized margin.
Step 5: Margin Call at Level 100%
Sarah reaches the margin call level when her account equity matches her used margin because there is no distinct stop out level. In this case, her margin call is triggered at 100%, which could have serious ramifications.
Step 6: Trade Closure and Losses
Sarah’s broker automatically closes her losing position when the margin call is triggered. The deal closes with a realized loss equal to the difference between the opening and closing prices multiplied by the contract size (10,000 units in this case).
Assume, for example, that the GBP/USD exchange rate was 1.3900 at the time of the trade closure. The actual loss would be:
Realized Loss = (Opening Price – Closing Price) × Contract Size
Realized Loss = (1.4000 – 1.3900) × 10,000
Realized Loss = $100
Sarah’s trading account balance has been lowered by $100 due to the realized loss, leaving her with $4,900.
Because there was no distinct stop out level in this case, Sarah’s losing trade was closed as soon as her account equity reached the same level as she used margin. Due to the lack of further buffer, the trade was quickly closed, resulting in a realized loss on her account. Poor Sarah, again 🙁
To prevent hitting the margin call level, traders must grasp the margin requirements, check account equity, and implement appropriate risk management tactics. Proper risk assessment, stop-loss orders, and the use of proper leverage are critical for conserving capital and effectively minimizing possible losses.
Remember that this situation is merely hypothetical, and actual margin call calculations may differ based on the broker and individual trading conditions. To fully comprehend your selected broker’s margin call policies, you need to become acquainted with their terms and conditions.
So, are you wondering how to avoid this scenario or margin call situations?
Nah, you should face it to know it for real life, and you’ll get the best trading experience for your entire life:)
Well, you can follow these tips:
- Understand Your Risk Tolerance: PLZ, Before you even consider entering the forex market, you should be aware of your risk tolerance. In the absence of a distinct stop out level, you must choose how much you can afford to lose without jeopardizing your financial security. Remember that forex trading should never expose you to greater risk than you can bear.
- Tighten Your Risk Management: Because there is no separate stop out level, it is essential to tighten your risk management game. Maintain a limited level of leverage, place tight stop-loss orders, and never risk more than a small percentage of your account on a single trade. This strategy will help you minimize potential losses and avoid a margin call. You’ll regret for your entire trading life, if you don’t learn and have proper risk management, for sure:)
- Stay up to date: Keep up to date on economic news, market trends, and technical analysis. Being aware of future events or potential market-moving variables might help you make better trading decisions and avoid unexpected market shocks that could result in a margin call. Don’t be a disconnected person, it’s so lame!
- Diversify Your Portfolio: Don’t put all of your eggs in one basket (ho ho ho, I like this phrase) of currency pairs. Diversifying your trading portfolio can help spread the risk and lessen the likelihood of a single bad trade destroying your entire account. Remember that with a margin call at level 100%, capital preservation is significantly more crucial.
- Cut Your Losses: If you’re in a losing trade, don’t hang on to it in the hope of a miraculous turnaround. Act quickly and reduce your losses. While losses are unavoidable in trading, it is critical to reduce them before they spiral out of control and force you to make a margin call.
- Learn from Your Mistakes: Forex trading is a never-ending learning experience. If you come across a margin call at level 100%, use it as a learning opportunity. Examine what went wrong, revisit your trading approach, and make necessary adjustments. The key to long-term success is to consistently improve your abilities.
For any forex trader, facing a margin call at level 100% without a distinct stop out level can be a nerve-wracking event. However, with proper planning, risk management, and a resilient mindset, you can successfully handle this challenge. Remember that forex trading is not for the faint of heart, but by arming yourself with information and a good dose of humor, you may emerge stronger and wiser from even the most perilous situations.
So, traders, saddle up, and may your trades be profitable and your margin calls be few and far between! (Hopefully, you can be encouraged)
Boost Your Earning.