Margin call

A margin call is the action taken by the broker to close your trade when the amount of money in your account can no longer take any losses you may incur. If your equity drops below your initial margin, the broker will close several or even all of your open positions. They will close at least as many positions as is necessary to eliminate any risk of the account balance dropping below the minimum margin requirement.

Margin calls therefore eliminate the possibility of a trader owing more than they can afford to pay back on losing trades.

For example, let’s assume your account balance is $1,200 and your account is leveraged 100:1. If you open a position with a standard lot of EUR/USD, you are required to have an initial margin of $1,000.

In this case, every time the EUR drops by one pip against the USD, you will incur a loss of $10. If the EUR/USD then drops 20 pips, your loss would be $200.

At this time you still have enough money in your original account, as $1,200 - $200 = $1,000. However, if the EUR/USD falls by 1 more pip, you will drop below the margin requirements and your EUR/USD position will automatically be closed.

This closing of the open position is the margin call.

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