Margin calls: What they are & how to prevent account closeouts

If there is one phrase that sends a shiver down the spine of every retail trader, it is "margin call." Back in the time, and in the movies, this is depicted as a frantic phone ringing on a chaotic trading floor. In the modern world of online trading, it's much more silent — and urgent. It is a flashing red notification on your screen, followed instantly by the liquidation of your positions.

But a margin call isn't just bad luck; it can be a certainty if you mismanage risk. Look at it this way: when a trader is overleveraged, they are simply asking the markets to move in their favor ASAP, and because the account is overleveraged and fully margined, any adverse price move may result in a margin call.

To understand a margin call, we must first understand what margin is.

When you open a leveraged trade, you aren't paying the full value of the currency position (which could be $100,000 or more). Instead, you put down a "good faith deposit" known as margin. Your broker locks this collateral to keep the position open.

A margin call occurs when your floating losses grow so large that your account equity (or NAV - net asset value) falls below the regulatory/broker's required margin needed to maintain the open positions.

Think of it like buying a house. If the value of the house drops significantly, the bank gets nervous about the loan and demands you put up more cash. If you can’t, they take the house. In trading, a broker closes trades and liquidates open positions.

Margin calls are rarely the market's fault. Trader errors almost always cause them; generally speaking, they mostly fall under two main drivers:

• Over-leveraging

There are many reasons traders over-leverage their accounts, including but not limited to inadequate trading capital, unrealistic profit expectations, poor risk management, excessive trading, greed, and revenge trades.

Read more: Introduction to one of the most common trading mistakes

If we were to evaluate our trading behavior against the reasons above, we may have a better understanding of our own mistakes. Let's take greed as an example. There is nothing wrong with being greedy or wanting more out of a trade; we are all human. However, our trading greed should be managed and controlled so it doesn’t lead to ruin.

Leverage (e.g., 1:50) or higher may sound appealing because it requires less margin to open a trade. However, this reduces the "cushion" you have against adverse price moves. High leverage + small account = fast margin call.

• Psychological factors

Traders hold onto losing trades, hoping the market will turn around. And even though markets do turn around eventually, it is not enough justification for a trader to get into a margin call situation.

As the loss grows, and in some cases, as the trader continues to add more trades to an existing losing position, it eats away free margin until nothing is left. Traders must continuously monitor their margin levels.

A trader may also be exposed to multiple factors simultaneously, such as being undercapitalized, holding a prominent position in an illiquid market ahead of a significant economic event or an exaggerated market move, all of which can result in an instant margin call.

Bottom line, the above are just basic examples of how we can get into a margin call; however, a trader can identify their own reasons for not following basic risk management tools.

You don't need to guess when a margin call is coming; you can calculate it. Your margin level percentage determines it entirely. Generally speaking, a trader should understand margin requirements, the regulatory environment, and the broker’s margin call policies before placing any trade. Traders should also monitor their trading dashboard and be aware of their equity position relative to margin requirements.

It is also essential to know that margin requirements frequently change due to various reasons, including shifts in exchange rates, regulatory changes, or higher risk situations that may affect a specific currency, such as a significant political change or a war.

Margin requirements for a specific trade are usually available on the new order window, and the total margin used is also displayed on the platform. The margin percentage bar or tool is an additional feature that helps visualize the margin status on an account; however, it may be displayed differently depending on the platform or interface a trader is using.

For example, the image above shows how the margin percentage is displayed on OANDA’s web platform. The case is slightly different with an OANDA account, accessible through third-party platforms such as MetaTrader or TradingView. Although the exact regulatory margin requirements apply, the margin percentages are displayed differently depending on how a platform is configured to display them or uses a different formula for calculating margin percentages.

On OANDA’s web trading platform, the 50% mark (blue color) indicates that the account is fully margined; in other words, the trader is using the entire account equity, or “net asset value (NAV),” as margin for open positions. If the open positions continue to lose money and the NAV drops below the margin requirements, the margin percentage bar will cross the 50% level, the account will enter a warning status, and it will become subject to a margin call.

A margin call will be triggered if your account's net asset value (NAV) falls below the minimum regulatory margin requirement. If this happens, you may deposit more funds into your account to increase your account’s NAV or close open positions to return your net asset value to a level above the regulatory margin. You may also instantly transfer funds internally from any of your sub-accounts with a balance to your under-margined account.

If your net asset value falls below the regulatory margin requirements, you will receive a margin call alert by email. Margin call checks and alert emails are sent daily at 3:45 p.m. (Eastern time). They will only be sent if your account is below the regulatory margin requirements at the margin call check time (3:45 PM EST).

When an account remains under-margined for two consecutive trading days, all open positions will be automatically closed using the current OANDA rates at the time of closing (3:45 PM EST).

It is very important to know that:

• During the two consecutive days, even if a deposit was made and/or position size was reduced to get out of the margin call status, the trader needs to ensure that their equity or Net asset value (NAV) remains above the margin requirements (Margin percentage below 50%) at 3:45 PM EST on the second day and that they are out of the margin call status. The margin call status will be updated under the activity tab on the OANDA web platform as “Margin call exit”.
  
• A margin closeout can also occur if the margin closeout percentage reaches 100% at any time, including the period during the two consecutive days.

If trading is unavailable for certain open positions, the margin closeout is still active. In that case, those positions will remain open, and the OANDA systems will continue to monitor your margin requirements. When the markets reopen for the remaining open positions, a margin closeout may occur if your account remains under-margined.

As previously mentioned, you can avoid margin closeouts by reducing the margin you use. You can do this by closing some trades or depositing more funds into your trading account. However, bear in mind that funds transfers take time, and in some cases, funds may not be available in your account before the margin call triggers. Please find out more about margin closeouts on our margin rules page.

Note: In a fast-moving market, there may be little time between warnings or insufficient time to warn you. Be mindful of the “margin closeout percent” field in the account summary of the OANDA user interface. The closer the margin closeout percentage is to 100%, the closer you are to a margin call closeout.

The good news is that margin calls can be preventable; there are a few basic points a trader can consider to minimize the risks that can lead to a margin call:

• Effective leverage

Utilize effective leverage rather than the max available, appropriate position size that is proportionate to trading capital, and monitor the margin level % on your trading platform.

• Use stop-loss orders

Forex markets trade 24 hours a day, 5 days a week, and may react violently to global news. It may be better to consider a stop-loss order even if a trader decides to re-enter the same trade on a later date or at a different price.

• Be wary of "news trading" and weekend price gaps.

Liquidity dries up during major news releases (such as NFP or central bank rate decisions) and on weekends. During these times, "slippage" may occur, including stop-loss orders.

You might have a stop-loss set at 1.1050, but the price "gaps," and the broker executes your exit at the prevailing market price of 1.1030. For an over-leveraged account, this massive jump can trigger an immediate margin call. Consider closing or reducing tight margin positions before the market closes on Friday, especially in anticipation of major high-impact news events.

In summary, the margin call is not a market anomaly but a predictable consequence of mismanaging risk and a lack of discipline. While losses are an unavoidable cost of doing business in trading, a margin call represents the ultimate failure: going out of business. By adhering to core risk rules and principles, consistently utilizing hard stop-loss orders, and constantly monitoring the margin level percentage, traders can build a robust defense against liquidation. Protect your capital, respect the power of leverage, and you will ensure that you never have to face that flashing red screen.