7 Reasons for Margin Call in Forex Trading

Hello forex traders,

chp3-margin-callMany forex traders trade blindly–as I used to do-and make a lot of mistakes in their trading. One of the most terrible things that can happen to a novice trader is margin call. Margin call has been known to destroy a lot of business dreams. however, before we discuss this mistakes, what is margin call?

Margin is the amount of money required to trade a certain lot size. It is a minimum deposit and depends on leverage ratio. Novice traders generally search for high leverage like 250-1and 400-1. this means they would need a smaller margin to trade high amounts. Ordinarily, this should be a good thing but it isn’t. It works like a sledge hammer. lets take an example.

A forex investor puts $500 into his forex account and trades with a 250-1 leverage. what this means is that to trade a standard lot($100,000), he would need to deposit just $400. A pip gain would result in a $100 gain which is amazing for such a small investment.

This leads us to margin call. Margin call occurs when your broker notifies you that your margin can not cover your current losses. what this means is that you lose the deposit. In the example above, a four pip loss would result in a $400 loss and a margin call. The traders money would be depleted.

The seven mistakes that lead to margin call include:

  1. Ignorance of News events.
  2. Over trading i.e high leverage
  3. No trading plan and system
  4. Not paying close attention to margin call
  5. Not using stop loss order.
  6. Allowing maximum drraw on your account
  7. Not researching or listening to professionals.

References: 

  1. A Theory of Trading Volume (JONATHAN M. KARPOFF-1986)
  2. The Sociology of Financial Markets (Karin Knorr Cetina and Alex Preda-2004)
  3. Trading Tasks: A Simple Theory of Offshoring (Grossman, Gene M.; Rossi-Hansberg, Esteban-2008)
  4. Estimating Trade Flows: Trading Partners and Trading Volumes (Elhanan Helpman, Marc Melitz, Yona Rubinstein-2007(
  5. Tests of equal forecast accuracy and encompassing for nested models  (Todd E Clark, Michael W McCracken-2001(
  6. Tests for Forecast Encompassing (David S. Harvey , Stephen J. Leybourne & Paul Newbold-2012)
  7. The Encompassing Principle and its Application to Testing Non-Nested Hypotheses (Grayham E. Mizon and Jean-Francois Richard.1986)

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