By now, you would have known that risk management is the most crucial factor of consideration while trading in a margin account. The trader is not solely responsible for their risk, but brokers, too, have some features that directly or indirectly try reducing the risk of the traders. In the previous lesson, we understood what margin level was. And in this lesson, we shall be putting more meaning to it by introducing another term which is correlated with margin level. The margin term, which will be discussed in this lesson is ‘Margin Call Level.’ So, without any further talks, let’s get our feet wet with this topic.
Margin Call Level
Margin Call Level, as the name suggests, is a specific level in Margin Level when the broker warns the trader that their positions are at risk. It is a threshold level when the broker alerts the trader that some of their trades can be forced to close.
As mentioned, the Margin Call Level is closely related to Margin Level. Hence, Margin Call Level is expressed in terms of percentage.
Let’s say the Margin Call Level set by the broker is 100%. So, if an account’s Margin Level falls below 100%, then it is said that the account has hit the Margin Call Level.
Margin Call and Margin Call Level is pretty much the same thing. Margin Call is simply a different version of the Margin Call Level. If Margin Call Level is a specific ‘level’ set by the broker, Margin Call is a ‘call’ or ‘notification’ given by the broker. So, when an account’s Margin Level falls below the Margin Call Level, the account holder will receive a call or notification from the broker notifying the same.
This above explanation was the simple exterior working of Margin Call. If we were to see the internal working of it, one would receive a Margin Call when the Equity value becomes less than the Used Margin. That is when the floating loss becomes larger than the Used Margin.
Now, let’s get this concept cemented by considering an example.
Assume that a trader has deposited $1,000 in his account. Also, he went short on EURUSD for 10,000. The required margin for this trade was $300. Considering this to be the only running trade, the Used Margin will be $300 (same as the Required Margin).
Let’s say the trade is performing well, and the current unrealized P/L is $100. The Equity at this point of time will be,
Equity = Account Balance + Floating P/L = $1,000 + $100 = $1,100
Now, since the trade is running in profit, the Margin Level will obviously be above the Margin Call Level.
Later, let’s say the trade is going into the negative to -$700. The Equity now will turn out to be $300 ($1,000 – $700).
With these values, let’s find out the Margin Level.
Margin Level = (Equity / Used Margin) x 100% = ($300 / $300) x 100% = 100%
Assuming that the Margin Call Level set by the broker is 100%, the trader will now receive a Margin Call as the current Margin Level is at 100%.
Now, wondering what will happen if the Margin Level falls significantly below the Margin Call Level? The answer to this shall be discussed in the next lesson. Make sure to take the quiz below before you go.