To understand the concept of Margin Call first you need to know what the Margin means.
The margin can be defined as the amount of money in the account that is needed as a guarantee to carry out operations in the market. Each broker can set different margin requirements. It is calculated by the size of the operation and the leverage. For example, if we operate with 1 lot and have a leverage of 1:100, the margin required if the base currency is the USD is as follows: 100,000 USD / 100 = 1,000 USD. This means that for each batch transacted, we require to have in the account a capital of 1,000 USD. If the base currency (the first of the currency pair) is not the USD, the broker converts to that currency.
The free margin is the one available to carry out the operations. Following the example above, suppose that we opened a trading account with 2,000 USD. If we want to open a position of 1 lot, this requires an available margin of 1,000 USD, so once the position is open we have a free margin of 1,000 USD.
Continuing with the margin call: If we suffer losses that leave the free margin below the margin required to cover open positions, the broker will proceed to perform a margin call and close all operations. Due to the fact that at the moment open positions add up to significant losses, the transactions are closed as a security measure of the broker to prevent the trader finished with a negative balance. This is done for the benefit of the trader and of course for the broker, since in this way the trader does not get to the point of owe money to the company.
Example: Assume that we have an account with USD 10,000 and a leverage of 100: 1 and we open a position with 1 lot. In this case the margin used is USD 1,000 and the free margin is USD 9,000. If the losses exceed $ 9,000, the broker will apply a margin call.
Basically this is the way the margin call works, however, each broker may have different margin policies and it is the trader’s job to find out these before opening an account and performing an operation.
Things to keep in mind: Some brokers increase margin requirements during weekends. For this reason, if an investor plans to keep positions open during the weekend should be informed of the broker’s policies in this regard. There are brokers with a margin requirement of 30% and even higher.
Concepts such as margin requirements, leverage, level of risk and others related to Forex trading must be fully understood by the trader. Also, it is equally important that the trader understands the margin policies of his broker so that he is aware of the rules of the game before performing a single operation.