How do I avoid a margin call?
Margins calls often occur due to overleveraging. Using more leverage can magnify your gains, but it can also magnify losses which will quickly deplete your usable margin. The more leverage you use, the faster your losses can accumulate.
The position size that you can hold in your account using leverage is determined by your account equity and the margin settings in your account. To track how close you are to the maximum position size for your account, Friedberg Direct provides real-time information on usable margin (the account equity available to take on new positions—USbl Mr) and used margin (the account equity needed to maintain open positions—Usd Mr). Together, used margin and usable margin equal account equity.
When you use excessive leverage, a few losing trades can quickly offset many winning trades. To clearly see how this can happen, consider the following example.
- Scenario: Trader A and B both have a $10,000 account balance. Trader A buys 500k (50, 10k lots) of USD/JPY while Trader B buys 50k (5, 10k lots) of USD/JPY.
- Question: What happens to the account equity of Trader A and Trader B's accounts when the USD/JPY price falls 100 pips against them?
- Answer: Trader A loses $4,150.00, 41.5% and Trader B loses $415, 4.15% of their account equity. By using lower leverage, Trader B drastically reduces the dollar drawdown of a 100 pip loss.