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What Elicits a Margin Call?

Many forex brokers and dealers offer mini and micro accounts so we can trade online. They use leveraged trading where one can control a big lot for a fraction of the investment. However, those who want to enter the spot market as a speculator should be familiar with a margin call. This is a call from your broker or dealer asking you to put more money in your account because you've lost most your investment already. This sounds bad but it's dreadful when you get a margin call an hour or even a few minutes after opening a position. So, what elicits a margin call?

Let's say you're interested in opening a mini account online with a site offering 100:1 leverage with 1% margin requirement and a minimum $300 investment. That's a $300 minimum account deposit so you can trade a lot of 10,000 units for $100 per lot. Remember that a typical online account uses this format: equity (or investment) = used margin + unused (or usable) margin.

So, you open the mini account by investing the minimum $300. At this point, you have a total equity of $300 which is equal to your unused margin. Then you decide that the USD/CHF or "Swissy" will go up so you open a position by buying 20,000 (or two lots) of the currency pair. Your account information will then change to reflect this transaction. It will show: $300 equity = $200 used margin + $100 unused margin.

But much to your disappointment, Swissy falls instead of rises. And as the price drops, your unused margin will dwindle which will directly decrease your equity while your used margin will remain unchanged. And since a pip in one lot is equivalent to a dollar, your two lots will lose two dollars on every pip drop.

If you do the math, you'll see that the price only has to drop 50 pips before you lose your entire $100 unused margin. So when your account turns into this: $200 equity = $200 used margin + $0 unused margin, it will trigger a margin call.

Online forex traders don't like a margin call. So, despite the allure of leveraged trading in the spot market, it can only take a short period of time when prices can go against your position and use up your investment. So keep track of your unused margin and close your positions in time. Because what elicits a margin call is your equity being used up that there's no more money to maintain the position in your account.