A margin call is what happens when you have no money left in your account. To protect you from losing more money than you have your broker closes out your positions. This means you can never lose more money than you have in your account.
Before learning what a margin call is you need to know the definitions of two terms.
Used Margin: The amount of money in your account that is currently used in open trades. If you have $6,000 capital in an account and you have $1,000 in an open trade then your used margin is $1,000. If you have $3,000 capital in an account and you currently have $600 in an open trade your used margin is $600.
Usable Margin: The amount of money in your account minus any open trades. We will continue from the same examples used above. If you have $6,000 capital in an account and you have $1,000 in an open trade your usable margin is $5,000. If you have a $3,000 capital in an account and you currently have $600 in an open trade your usable margin is $2,400.
When your usable margin reaches $0 your broker will automatically margin call you. With good money management this should never happen but newbies can slip up.
Below are a few examples of margin calls:
Tom opens a standard Forex account with $4,000 and 100:1 leverage. This means that on each trade Tom must enter a minimum of 100,000 units ($100,000). With 100:1 leverage Tom must enter $1,000 of his own money to each trade.
Tom analyzes GBP/USD and decides that the pair is going up. He opens a long position with 2 standard lots on GBP/USD. This means Tom is trading $2,000.
Disaster strikes GBP/USD goes down instead of up. Tom curses himself for taking a long but he keeps the position open. If Tom keeps the position open and it moves too far against him he will get a margin call.
Before Tom opens his position he has $4,000 in usable margin. After opening a position with 2 standard lots ($2,000) his used margin became $2,000 and his usable margin became $2,000. If GBP/USD drops by too many pips and Toms useable margin reaches $0 his broker will close out his trade. This protects Tom from losing more money than he has in his account.
Mary opens a mini Forex account with $1,000 at 100:1 leverage. She analyzes EUR/USD and decides to go short. Mary enters 7 mini lots ($700) short on EUR/USD. Before entering the positions, Mary’s usable margin was $1,000. Now that she is in the trade her usable margin is $300.
Again disaster strikes and Mary’s trade goes against her. If Mary’s usable Margin reaches $0 her trade is automatically closed, so she cannot lose more money that she has in the account.
Margin calls are easily avoided if you trade sensibly. However, this is more advanced stuff that you will learn later, Apprentice Ninja.
It is very important that you check what the margin polices are with your broker. Margin policies can differ from broker to broker so if you plan to open an account remember to ask.