What is a margin call?

Understanding margin in trading

What is margin?

Margin is the deposit you must hold in your trading account to open and maintain a leveraged position. Think of it as a good-faith deposit rather than a fee. Your broker holds this amount as collateral while your position remains open.

When you trade on margin, you are essentially borrowing funds from your broker to control a larger position than your cash balance alone would allow. The margin requirement is usually expressed as a percentage of the total position value.

Example margin requirements:

The lower the margin requirement, the greater the leverage and the larger the position you can control with the same deposit.

How leverage and margin are connected

Leverage and margin are two sides of the same coin. Leverage expresses the ratio between your margin deposit and the total position size. A 10% margin requirement equals 10:1 leverage. A 5% margin requirement equals 20:1 leverage.

This relationship is important to grasp. Higher leverage means smaller margin requirements, which allows you to take larger positions. However, it also means your account is more sensitive to price movements. A small adverse move can quickly erode your equity when you are highly leveraged.

UK retail traders face leverage caps set by the Financial Conduct Authority. For major forex pairs, the maximum is 30:1. For individual shares, it drops to 5:1. These limits exist because regulators recognise that excessive leverage increases the probability of significant losses.

What triggers a margin call?

Maintenance margin explained

Your broker sets two key thresholds: the initial margin required to open a position and the maintenance margin required to keep it open. The maintenance margin is typically lower than the initial margin.

When your account equity falls equal to or below the maintenance margin level, your broker issues a margin call. Your equity equals your account balance, plus or minus the unrealised profit or loss on open positions.

Common scenarios that lead to margin calls

Several situations can push your account toward a margin call:

• Sharp adverse price movements against your open positions

• Holding positions overnight when markets gap against you

• Adding new positions without sufficient free margin

• Increased volatility causing larger-than-expected swings

• Holding positions through major economic announcements

The speed at which margin calls occur depends on your leverage level. With 30:1 leverage on a forex trade, a 3.33% adverse move would wipe out your entire margin. At 5:1 leverage, you could withstand a 20% adverse move before facing the same outcome.

What happens when you receive a margin call?

Broker notification process

Most brokers notify you through email, platform alerts, or SMS when your account approaches the margin call threshold. Some platforms display real-time margin level indicators so you can monitor your position without waiting for a formal notification.

However, in fast-moving markets, there may be little time between notification and action. Some brokers issue warnings at multiple levels, such as 100% margin level and then again at 80%. Others may proceed directly to closing positions if you breach the maintenance margin.

CMC Markets’ specific procedures are outlined in our terms and conditions. Reading these before you trade is essential.

Your options: deposit funds or close positions

When you receive a margin call, you typically have two choices:

• Deposit additional funds to restore your equity above the maintenance margin

• Close some or all your open positions to reduce your margin requirement

If you do neither, your broker has the right to close your positions without your consent. This is intended to help limit further losses, but forced closure may crystallise losses and can occur at unfavourable prices, especially in fast-moving markets. Brokers generally close positions starting with the largest or most unprofitable. In CMC Markets’ case, standard margin positions are closed before other types of positions such as prime margin or guaranteed stop-loss positions.

Remember that acting quickly matters. Markets can move further against you while you decide, making the situation worse.

Margin calls in forex trading

Margin level and free margin

Forex traders often encounter specific terminology around margin. Two key terms are margin level and free margin.

Free margin in forex is the amount of equity in your account that is not tied up as margin for existing positions. It represents the funds available to open new positions or absorb losses.

Free margin = equity - used margin

Margin level in forex expresses your equity as a percentage of your used margin:

Margin level = (equity / used margin) x 100

When your margin level drops to 100%, your equity exactly equals your used margin. You have no free margin left. Most forex brokers set their margin call threshold somewhere between 50% and 100% margin level.

Forex margin example:

As your losses increase, your margin level falls. Once it hits your broker's threshold, the margin call arrives.

How to manage margin call risk

Practical steps to reduce exposure

Managing margin call risk begins before you open a position. Consider these approaches:

• Use less leverage than the maximum allowed. Just because you can trade at 30:1 does not mean you should.

• Keep a cash buffer in your account beyond your margin requirements. This provides breathing room during volatility.

• Size positions relative to your total account equity, not your available leverage. A common guideline is risking no more than 1-2% of account equity on any single trade.

• Monitor your positions regularly, especially during volatile market conditions.

• Understand the specific margin requirements for each instrument you trade. Exotic forex pairs require more margin than major pairs.

The importance of stop-loss orders

Stop-loss orders close your position automatically when the price reaches a specified level. They are a practical tool for limiting potential losses on individual trades.

Setting a stop-loss helps you define your maximum acceptable loss before entering a trade. This discipline reduces the chance that any single position will drain your account to margin call territory.

However, stop-losses do not guarantee execution at your specified price. In fast-moving or gapping markets, your order may be filled at a worse price than intended. This is called slippage.

CMC Markets offer guaranteed stop-loss orders for an additional cost. These ensure execution at your exact specified price regardless of market conditions and are refunded if not triggered during the lifetime of the trade.

Key takeaways

• A margin call is a demand from your broker to deposit funds or reduce positions when your equity falls below the maintenance margin.

• Margin is the collateral you deposit to hold leveraged positions. Leverage amplifies both potential profits and potential losses.

• Margin calls are triggered when adverse price movements erode your account equity relative to your margin requirements.

• You can respond by depositing funds or closing positions. If you do neither, your broker may close positions on your behalf.

• In forex, margin level and free margin help you monitor how close you are to a margin call.

• Managing risk through position sizing, leverage control, and stop-loss orders can reduce your exposure to margin calls, though no strategy eliminates risk entirely.

Leveraged trading is not suitable for everyone. The possibility of losing more than your initial deposit exists with some products. Always ensure you understand the risks before trading.