In the previous lessons, we understood some basic concepts about Margin, which was not much relevant with risks in a margin account. In this and the next lesson, we shall be discussing Margin Call Level and Stop Out Level, which is closely correlated with risks involved in a trading account.
What is Margin Call Level?
Margin Call Level is a specific value in trading when the Margin Level reaches its threshold.
This threshold is the level when some or all your positions have a possibility of being closed forcibly.
Just like Margin Level, Margin Call Level is expressed in percentages. For example, most brokers have their Margin Call fixed at 100%. That is, if your Margin Level falls below the 100% mark, a Margin Call will be initiated.
What is Margin Call?
Margin Call, as the name pretty much suggests, is a call or notification by the broker informing you that your Margin Level has dropped below the minimum requirement Level. And this minimum requirement Level is nothing but the Margin Call Level.
Back then, this notice used to be in the form of an actual call, but nowadays, it is being notified by email or text message.
Technically speaking, a Margin Call occurs when your Equity becomes less than the Used Margin. In other terms, when your unrealised losses get larger than your Used Margin, you will most likely receive a Margin Call.
Margin Call Level and Margin Call: What is the difference?
Margin Call is a scenario which is will be triggered by the broker when your Margin Level reaches a threshold. It is an event where the broker takes action to inform you about your positions.
Whereas, Margin Call Level is a threshold set by the broker to initiate a Margin Call. And this threshold is usually expressed in percentages.
Let us say your broker has set the Margin Call Level at 100%. So, if your Margin Level falls below 100%, you will receive a notification (Margin Call) from your broker.
Let’s say you have deposited $1,000 in your account and you went long on USD/JPY with 10,000 units and which had a Required Margin equal to $400.
Since this is the only position you have, the Used Margin will be same as the Required Margin, i.e., $400.
Now, assuming your trade initially is at breakeven, the Equity will be $1,000.
Later, let’s say that the trade starts to go in a loss. If the loss becomes $600, the Equity turns out to be,
Equity = Account Balance + Floating P/L
= $1,000 – $600
Equity = $400
Now, calculating the Margin Level for the same,
Margin Level = (Equity / Used Margin) x 100%
= ($400 / $400) x 100%
Margin Level = 100%
Here, we can see that Margin Level is 100%, indicating that you won’t be able to open any new positions unless the trade reverses in your direction or your Equity becomes more than the Used Margin.
Other Consequence if Margin Level falls beneath 100%
If the market still continues to go against you, the broker will wait until the Margin Level reaches to another specific Level. And once this specific level is reached, the broker will be forced to close your positions. This specific position is called Stop Out Level, which shall be discussed in the upcoming lesson.