Filter level against margin call

Filter level against margin call

When you plan to choose the forex broker with which you open your first trading account in the currency markets, you will be hesitant to hear terms such as the level of liquidation (Stop-Out) and call margin and leverage. Many Forex brokers are only exposed to margin call rules, while others prefer to set a margin between margin calls and liquidation levels. So what is the meaning of the "Stop Out" level, and what is the difference between it and the margin call?

Before we begin, let us quickly explain the margin definition. Margin trading for many is one of the biggest catalysts for forex trading. When trading in the currency market you do not need to own $ 100,000 to open a $ 100,000 deal on a currency. You will only need a fraction of that amount, for example, only $ 1,000, if your broker offers a leverage of 1: 100. This means that you are entitled to trade $ 100 in the respective currency for every $ 1 you deposit. This process is called margin trading, which it sees as an effective tool for making big profits overnight - but it is also able to destroy you in a short period of time, which is often the closest probability!

Filter level against margin call

You can rename leverage 1: 100 by saying that you will trade with a 1% margin. In other words, the brokerage company will ask you to place 1% of the transaction value as a minimum margin guarantee. When you join a forex broker, you'll notice some percentages related to margin call and liquidation levels, which usually refer to what is called an account share. For example, the broker may apply margin call at 20% while the level of liquidation is at 10%. Translating these ratios simply means that if you have an open position and the account share falls to 20% of the margin to keep in your account, the platform will issue a margin call. In this case, the margin call function is limited to being a warning and a tight format that recommends closing some or all of your transactions, or placing additional funds to meet minimum margin requirements. If you do these actions in time, you will be safe (but we recommend closing trades as soon as possible and returning to demo trading). If you fail to do any of these actions and prefer to keep your positions as they are, then the market continues to move against you and the share of the account falls to 10% of the required margin, it will have reached the level of liquidation of transactions (Stop Out). In this case, the platform will automatically close all your trades, starting with the ones that are making the most losses at the moment. If necessary, the Broker will close all transactions to meet minimum Margin requirements.

Another diversification of transaction liquidation due to margin deficits is the application of the margin call rule at 100%. This means that once your account share falls below 100% of the minimum margin requirement, it will not only be margin call, but all your transactions will be closed just as you would when you hit the filter level. This system does not issue any warnings or advance alerts - it closes transactions directly.

How can you avoid these catastrophic scenarios? Avoiding facing the margin call and / or reaching the transaction liquidation level requires that the funds that you can afford to lose are limited to trading. In other words, you must manage your money wisely and not use the leverage unless circumstances so require. The leverage does not mean you have to use it! Many of the winning traders - rather, most of them are trading only 2.5-5% of the share of the account - there is nothing to prevent this method from being used; it will be your best strategy if you are successful in the long term. But what should be done when reaching the level of liquidation or issuing a margin call? Quickly return to the demo trading account until you regain your earning potential and then go back to the real trading phase.

Some practical examples

Example 1 If you have an account with a broker apply the margin call at 50% and the level of liquidation at 20%. If we assume that your account balance is $ 10,000, you open a trading center with a margin of $ 1,000. If the transaction loss reaches $ 9,500, then the account share will be $ 10,000- $ 9,500 = $ 500, which is 50% of the margin used, and the broker will then issue a margin call. If the transaction loses $ 9,800, then the share of the account becomes $ 10,000 - $ 9,800 = $ 200, which is 20% of the margin used. In this case, the Stop Out level will be activated and the broker will close your losing position.

Example 2 If the broker applies margin and stop loss levels at 200% / 100%, your account balance is $ 1,500. If you assume that you opened a trading center with a margin of $ 200. If the transaction is a loss of $ 1,100, then your account share will be $ 1,500- $ 1,100 = $ 400, which is 200% of the margin used, so the margin call will be issued. If the transaction loss reaches $ 1,300, the account share becomes $ 1,500 - $ 1,300 = $ 200, which is 100% of the margin used, in which case your transaction will be automatically closed by the liquidation order.

Example 3 If your account balance is $ 5,000 with a broker applying the 150% / 100% margin call and liquidation levels. If you assume that you have opened a $ 1,000 margin, you will be exposed to the margin call if the transaction loss is $ 3,500 (that is, your stock will be $ 1,500 or 150% of the $ 1,000 margin). Transactions will be liquidated if the loss reaches $ 4,000 (ie the account share will be $ 1,000 or 100% of the $ 1,000 margin used). However, if you open a larger deal, using the entire account balance as margin ($ 5,000), then you will be exposed to the margin call once the deal is open and since the level of liquidation is 100%