How to Make a Margin Call

Assume you're a successful former British spy who now works as a currency trader. You deposit $10,000 into a small account.

The $10,000 will show in the “Equity” column of your “Account Information” box when you first log in.

Useful Margin

You'll also see that the “Used Margin” is $0.00 and the “Usable Margin” is $10,000, as shown in the diagram below:

“Equity” minus “Used Margin” will always equal your Usable Margin.

Equity – Used Margin = Usable Margin

As a result, Usable Margin is calculated using Equity rather than Balance. If and when a Margin Call occurs, it will be determined by your equity.

There will be no Margin Call as long as your Equity exceeds your Used Margin.

NO MARGIN CALL (Equity > Used Margin)

A margin call will be issued as soon as your Equity equals or falls below your Used Margin.

MARGIN CALL (Equity = Used Margin) = RETURN TO DEMO TRADING!

Let's pretend your margin need is 1%. You purchase one lot of EUR/USD.

The worth of your equity stays at $10,000.

Because the margin wanted on a small account is $100 per lot, the used margin is now $100. The Usable Margin has increased to $9,900.

Your Used Margin would be $0.00 and your Usable Margin would be $10,000 if you closed out that 1 lot of EUR/USD (by selling it back) at the same price at which you got it. The value of your equity would stay at $10,000.

Instead of closing the 1 lot, you (the adrenaline junkie, chop-socky guy that you are) became overconfident and bought 79 more lots of EUR/USD for a total of 80 lots because that's how you roll.

Your Equity will stay unchanged, but your Used Margin will be $8,000 (80 lots at $100 margin per lot). And, as shown below, your Usable Margin will now be $2,000:

If EUR/USD rises, you will make an outrageously large profit if you take this insanely risky strategy. This example, though, does not end with a fairy tale.

Let us present a terrifying image of a Margin Call that occurs when the EUR/USD declines in value.

The EUR/USD is starting to tumble. Because you are long 80 lots, your equity will fall along with it.

Your Used Margin will halt at $8,000 for the time being.

A Margin Call occurs when your equity falls below $8,000.

This indicates that at the current market price, some or all of your 80 lot position will be closed.

If your trade moves 25 pips against you and you bought all 80 lots at the same price, a Margin Call will take place.

PIPS FOR 25!

Humbug! EUR/USD has the ability to shift that much in its sleep!

How did we come up with the figure of 25 pips？ Each pip in a mini lot is worth $1, and you have an open position consisting of 80 mini lots.

$1 per pip multiplied by 80 lots equals $80 per pip.

Your equity increases by $80 if EUR/USD rises 1 pip.

If the EUR/USD falls by one pip, your equity falls by $80.

25 pips = $2,000 Usable Margin divided by $80/pip

Assume you bought 80 lots of EUR/USD at $1.2000 each. If the EUR/USD falls to $1.1975 or -25 pips, your account will look like this.

Your Usable Margin has now dropped below $0.00, and you will be receiving a MARGIN CALL!

Of course, you're a seasoned international spy who's dealt with far worse disasters.

Your pulse rate is still 55 bpm despite the ice in your veins.

This is how your account will appear after the margin call:

You lose $2,000 if the EUR/USD moves 25 PIPS, or less than.22% ((1.2000 – 1.1975) / 1.2000) X 100 percent!

You've lost 20% of your trading account! (($2,000 loss / $10,000 balance)) X 100%

In actuality, following a major economic data release, EUR/USD can swing 25 pips in a matter of seconds, and certainly that much during a trading day.

We didn't even think about the SPREAD!

We didn't include the spread in the example to keep things simple, but we'll do so now to make it more realistic.

Let's imagine the EUR/USD spread is 3 pips. This means that before a margin call, EUR/USD just needs to move 22 pips, not 25 pips.

Imagine losing $2,000 in less than five seconds!

This is what can happen if you don't grasp how margin works and how leverage works.

The unfortunate reality is that most rookie traders don't even start a $10,000 micro account.

You were able to withstand 25 pips before his margin call because you had at least $10,000.

If you had only $9,000 to begin with, you would have only been able to withstand a 10-pip decrease (including spread) before being forced to make a margin call. ten pips!