When you are trading on the forex market and are suddenly on the receiving end of a margin call, your reaction is likely, “Huh? I did not know that the forex market had these!” This is a more common than expected issue for forex market traders, and it is no surprise that this particularly happens to new forex traders who are just not yet accustomed to the way things work in the forex market. The conventional wisdom (what an oxymoron!) out there is that such a margin call is just about the worst thing that could befall a currency trader, yet that is not necessarily the case as you shall soon find out.
What’s a Margin Call?
A margin call is actually for the good of the forex trader because it is protection against the forex trader being able to lose all of his money in his trading account. Without the existence of this margin call, it would be theoretically possible for a forex trader to actually owe further money to his broker, which would really be the worst case situation.
You might remember the margin call from your time in the stock market, assuming you have ever traded on the stock market. A margin call there would be the equivalent of your broker alerting you with a message that you have to add more money to your trading account. This normally occurs as your equity is being depleted within your trading account.
In the forex market world, this margin call is not an actual and physical message or call from your broker to alert you to add more funds to your trading account! In the forex trading world, what happens is that, if you fail to have adequate equity within your trading account to keep your open positions viable, your trading platform software simply closes out any and all remaining open positions that you may be holding. As a result, all of your losses are going to be realized at the prevailing market rates.
Price Moves and the Margin Call
In the world of the forex market, the movement of the prices can be quite aggressive, definitely much more so than in the stock market, which can be relatively tame by comparison! As such, to deal with this price volatility, the forex market has come up with these automatic margin calls in part to help out any forex traders who are caught off guard when such price volatility strikes this currency market. In fact, you could even say that because of the extreme leverage that it utilized, each and every price move is actually magnified!
Thus, while it might seem a tad cold-hearted to utilize margin calls, it is clearly necessary, if only to protect some forex traders from being caught up in these wild price moves. The alternative, you ask? Without these calls, there would probably be more forex traders who would lose all of their money and be totally ruined in the forex market.
Potentially Fast Depletion necessitates Margin Call
If your equity gets too low in your trading account, your funds can be exhausted rather aggressively before you have the actual opportunity to make the call to add more funds! Again, you can then see why a margin call is actually a big help to a trader. The closing of any and all open positions of the trader, in an automatic fashion, ensures that the forex trader will not suffer being wiped out in the trading action of the currency market.
As you can see, the dreaded margin call is actually not all that dreaded because it does serve a very benevolent purpose. It actually shields a forex trader from the aggressive price movements of the forex market, which are very commonplace. Rather than having a forex trader wiped out totally due to volatile price action, the margin call was invented to look out for him.