A broker/market maker requires the trader to maintain certain level of “Equity” in his account to cover his open positions. If this level falls too low the trader will enter a “Margin call” situation. Different brokers will have different % values for their margin call policies.
- Customer should receive an automatic margin call notification when trading if the Equity should, at any time, equal or fall below 100% of the Used Margin.
- If the Equity should, at any time, equal or fall below 20% of the Used Margin for Customer’s Account in the aggregate, the broker will liquidate any part of or all Open Positions in a Customer’s Account. Closure of positions will be done on the basis of best execution prices available to the broker at that time.
- Customers are responsible for placing their own Stop Loss Orders to minimize losses.
- In addition, the broker may, from time to time and at our best effort, contact Customer and request that Customer deposit additional Collateral to secure Customer’s obligations to the broker.
- Notification – equity level is low.
- Automatic Closure of all trades – equity level is too low.
- Equity, Used Margin and Equity Level.
- Notification at Equity Level 100%.
- No new trades can be opened at this level.
- Occurs after MC Notification.
- Equity levels at 20%.
- ALL trades are closed, also profitable trades.
- If enough equity remains, client may open new positions.
The Investor has a number of options when they receive a “margin call”
- Do nothing, this way the investor is either (a) confident the market will return in his favour or (b) has no further funds to invest.
- Extend “stop losses” (if applicable) if there is sufficient funds in the account balance.
- Close out some positions to free up capital to allocate to the M/C.
- Add additional funds to the account and the investment to move the S/L further from the market position.
Calculating Equity levels
Equity level % = Equity/used margin x 100
- Example: ($500/$100) * 100 = 500%
- Example: ($100/$500) * 100 = 20%
A Customer has equity of $5,000 and an open position of 300,000 EUR/USD.
For such a position, the margin requirements would be $1,500 which stands for Used Margin as well. If the equity of the customer’s account falls to $1,500, the Customer would get a Margin Call Notification only. At this point the trader has a number of options we mentioned above.
If none of these options are auctioned and the equity continued dropping to reach $300 then the 300,000 EUR/USD position will be closed at market rate.
Client X has $1000 Balance and Equity.
X opens a trade of 50k EURUSD. Required Used Margin: $250.
Current Equity Level 400%. ($1000/$250 * 100).
Trade goes badly: Equity drops to $250. Equity Level 100%. ($250/$250 * 100).
Margin Call Notification sent = 100%
Trade gets even worse: Equity drops to $50. Equity Level 20%. ($50/$250 * 100).
Margin Call: Automatic Closure of ALL positions, regardless of PROFIT/LOSS