What is an example of a margin call?

Let's go through an example of a margin call in the context of forex trading:

Scenario: You have a forex trading account with a balance of $5,000, and you decide to take a leveraged position in the EUR/USD currency pair. Your broker requires an initial margin of 1% for this trade, which means you need to deposit $100 as collateral for a position size of $10,000 (100:1 leverage).

Step 1: Initial Margin Deposit You deposit the required initial margin of $100 into your trading account.

Step 2: Open the Trade With your $100 deposit, you open a long (buy) position in the EUR/USD currency pair at an exchange rate of 1.1000, trading a standard lot size of 100,000 euros.

Step 3: Trading Results Over the course of your trade, the market moves against you. The EUR/USD exchange rate falls from 1.1000 to 1.0900. As a result, the value of your position decreases, and your account balance is now $4,900 ($5,000 - $100 initial margin - $1,000 unrealized loss).

Step 4: Maintenance Margin Level Your broker has a maintenance margin level requirement of 50%. This means your account balance must be at least 50% of the used margin (initial margin plus unrealized losses). Your used margin is $1,000 (initial margin) + $1,000 (unrealized loss) = $2,000.

Step 5: Reaching the Maintenance Margin Level With an account balance of $4,900 and used margin of $2,000, you fall below the maintenance margin level. At this point, a margin call is triggered.

Step 6: Margin Call Notice Your broker sends you a margin call notice, informing you that your account balance is below the maintenance margin level, and you need to deposit additional funds to cover the deficit. In this case, you need to deposit at least $100 to bring your account balance back to the initial margin level.

Step 7: Meeting the Margin Call You decide to deposit an additional $100 into your trading account to meet the margin call. Your account balance is now $5,000, and your used margin is $2,000, which is equal to the initial margin.

Step 8: Avoiding Forced Liquidation By depositing the $100 to meet the margin call, you have avoided forced liquidation of your position. If you hadn't met the margin call, the broker might have closed your trade at a less favorable exchange rate, potentially resulting in more significant losses.

This example illustrates how a margin call occurs when a trader's account balance falls below the maintenance margin level due to losses in a leveraged trade. Meeting the margin call helps the trader maintain the position and avoid forced liquidation. Effective risk management and monitoring account balances are essential to handle margin calls responsibly.