Margin call: two words that no investor ever wants to hear. It means your broker requires you to deposit more cash or securities into your trading account to cover losing positions and losses.
While education and a sound risk management strategy are critical to achieving any level of success in forex trading, they are equally valuable to helping avoid a potential margin call. OANDA has always encouraged a prudent, risk-adverse approach to foreign exchange trading.
Two years ago, the team at fxLabs created and implemented “smart” account statements for OANDA’s trading clients. The purpose was to provide our customers with detailed performance data on their trading activity and personalized analysis on losing trades to help them understand why their strategies may have failed to match their expectations.
While implementing the account statement analysis, we processed tens of thousands of transactions to identify similar trading strategies and highlight any common errors traders may be making that result in margin calls.
The graph pictured above illustrates a typical month’s worth of transactions on fxTrade. It revealed that out of every 1,000 accounts with a 50:1 leverage, 302 accounts (or 30 percent) received at least one margin call in the time period specified. Comparatively, out of every 1,000 accounts with 10:1 leverage, only 23 accounts (or 2.3 percent) were subjected to a margin call. This latter group of accounts trading on 10:1 leverage received a margin call 13 times less than the accounts with a 50:1 leverage.
The term “leverage” is often used to describe margin requirements. For example, leverage of 50:1 corresponds to a margin requirement of two percent (one divided by 50 is 0.02 or two percent). A two percent margin requirement means that if you wish to open a new position, you must have two percent of the size of that position available as margin.
There are significant risks involved when trading with a highly leveraged account. While margin allows traders to make bigger trades and to potentially make significant profits, it can equally increase the chance of a large loss. That in-turn can trigger a margin call if funds in an account drop below the minimum required level.
To ensure clients can cover any losses they may incur, OANDA requires sufficient collateral or margin. Although there is no minimum deposit required to open an fxTrade account, the margin available in each account will limit the size of the positions the account holder can open.
Lowering leverage does not necessarily prevent margin calls. But as the statistics show, it can reduce your chances of being margin called since higher leverage imposes a higher margin requirement when placing trades.Subsequently, this helps OANDA clients to maintain the margin in their accounts in order to support their open positions and to reduce the potential of incurring losses.
What methods do you use to ensure you’re never caught in the unfortunate position to receive a margin call? What rate of leverage do you consider to be ideal? Please share your comments in the box below.