Why is margin call bad?

[spiffytech]

Reading about forex I get the impression that margin call is considered bad. Why is this? It seems to me like a nice safety net to protect you from owing lots of money to your broker and to ensure that you can't lose more in a trade than you have in available margin. Does something besides position closure happen when you get a margin call? Does your broker freeze your account or become hesitant to give you more margin?

[Cdawg]

Margin call is bad bad bad!!! You definately need to read through the school.

To put it simply, you've lost most of your account capitol (depending on your leverage).

Its a safety net in the sense that it prevents you from owing any money to your broker but i think thats more for your brokers benifit than your own.

[kagein]

I dont think it means you've lost most your capital...it means your losses have become greater than your usable margin.

Eg. you have a balance of 10k...after you've taken a trade your usable margin is 300(highly leveraged trade) when
your trade goes against you by 300 or more you'll get a margin call where the broker closes all your positions...so your new balance is now 9700.

i am not to sure on this though

[JonnyFX]

Margin call is bad because you lose money.
This is when your firm/broker just closes your trades whether they are in - or +. Obviously you are getting a margin call in the first place because most of your trades are in the -. So, of course you lose money. It's horrible. Avoid margin call at all cost.

[Cdawg]

I dont think it means you've lost most your capital...it means your losses have become greater than your usable margin.

Eg. you have a balance of 10k...after you've taken a trade your usable margin is 300(highly leveraged trade) when
your trade goes against you by 300 or more you'll get a margin call where the broker closes all your positions...so your new balance is now 9700.

i am not to sure on this though

For a 10k account we'll say 100:1 - BUY 1 standard lot ($1k) - EUR/USD - $10pip

Usable margin $9k : OH NO!! Euro drops 900 pips : usable margin = $0

MARGIN CALL, you just lost 9 grand.

Hence the saying leverage is a double edged sword.

[4xStar]

Reading about forex I get the impression that margin call is considered bad. Why is this? It seems to me like a nice safety net to protect you from owing lots of money to your broker and to ensure that you can't lose more in a trade than you have in available ...

Well .. it is only 'bad' if you do not have an unlimited supply of money to re-fund your account. As explained below by Cdawg, when you get margin-called it means the broker needs to liquidate all trades in your account to prevent your account from going below zero. Usually they will do this when your account is close to zero. So if you had a $10k account and get a margin call .. your account will be pretty much near zero. If you have another $10k to put back in it .. and plenty more where that came from .. well then you can just smile & go on

The power of forex is its leverage .. and that is also the reason 95% of traders fail. You've got to understand how the leverage works so you can always make it work for you not against you.

[Andrewunknown]

Margin (along with it's twin brother, leverage) bears the distinction of being a concept that is at once most misunderstood (well, neglected is more like it) while being among the most important to understand by any trader. Experienced traders (thousands of live trades) have a murky conception of it, not only novices - I know because I've talked a few in my day through simple margin calculations and "what-if" scenarios that a hour of study on the topic would cover.

Fortunately margin isn't as convoluted in Forex as it is with equities. Babypips does a fine job of covering the basics and your broker could certainly do the rest, so I won't get into any of that (boring anyway, really).

Something to keep in mind with calls (when a decline in your positions exhausts available margin) - and why they're bad - is that: as long as you have available margin (meaning the total of your positions is above something called maintenance margin), you can have unrealized losses ("paper" losses, as they're sometimes called), but you have the opportunity to recover from those losses because the positions generating them are still open. In short, there's still hope. If your available margin is exhausted, though, your broker's margin/risk personnel (perhaps automatically) may immediately put you into a call and liquidate your positions to offset their liability. That means unrealized becomes realized, "paper" becomes real, and your account equity (cash) is reduced to compensate.

All that said, your money management should be such that it is all but impossible to place yourself into a call. And that is important wording: the market does not place you into a call, and your broker doesn't really either: you do.

[tonymand]

All that said, your money management should be such that it is all but impossible to place yourself into a call. And that is important wording: the market does not place you into a call, and your broker doesn't really either: you do.

This deserves particular emphasis

[rhodytrader]

I dont think it means you've lost most your capital...it means your losses have become greater than your usable margin.

Eg. you have a balance of 10k...after you've taken a trade your usable margin is 300(highly leveraged trade) when
your trade goes against you by 300 or more you'll get a margin call where the broker closes all your positions...so your new balance is now 9700.

i am not to sure on this though

Margin calls are not about usable margin. That is simply margin free to open further positions. They are about maintenance margin, which is generally about half the initial margin (though you should confirm the exact specifics with your broker). That means if you get a margin call you've lost alot of money.

[spiffytech]

That means unrealized becomes realized, "paper" becomes real, and your account equity (cash) is reduced to compensate.

This is the part I'd been missing; I hadn't thought about potential regain. As for the money management part, setting a stop-loss on my trades could prevent this, yes?