Trading Forex- Understanding a Margin Call

Naturally when you first start trading you don’t like to focus on margin calls. We all hope we will never have one.
However it is good to understand what they are and when your broker will take that action.
First what is a margin call? Let’s assume you are trading 1 standard Lot with USD as the base currency and your account is $1000 USD. You have arranged with the broker a 100:1 borrowing (leverage).

This means you need as a minimum your $1000 as your margin. Once you have opened your trade and as it is trading the currencies spike against you and all of a sudden your margin is showing as $50 or less, at this point the broker will either contact you or make the call to close the trade. This limits his risk because you have deposited $1000 and your losses of $950 are covered. It can also be beneficial to you because if you are letting your losses run too long hoping it will turn around you could lose a lot of money, which you might not have.
The best way to approach this is to talk to the broker first so you know what their policies are.
If you are a day trader this next tip will not affect you. I am talking about when you leave a trade open over night. Forex as we know is global and depending on where you live the official end of day could be at an odd time for you. The forex market officially ends its business day 21h59 (London time).

What happens is simple any trade that is open is automatically “rolled over”. That way the trade is not closed and there is never any actual delivery of the currency. Most brokers will do this automatically and it will just keep happening. The point to note is the brokers will charge you interest if there is any differential between the interest rates of the country.

Example:
If you are trading EUR:GBP and Europe has an interest rate of 4% and England has an interest rate of 2% the differential is 2% . (these figures are for illustrative purposes only)
It works both ways, sometimes you gain the difference and other times you are charged it.
Example. If you bought the currency with the high interest rate, you gain; if you sold the currency with the higher interest rate then you are charged the difference.


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