When the Margin Call or "Kolya Morzhov is here" comes
The term Margin Call came to the foreign exchange market from the stock market. Literally, it is translated as a call due to problems with the collateral (margin). When losses were made and the amount of client's deposit reached the value corresponding to the pledge for an open position, the broker would pick up the telephone and offer the client to either add money to the deposit or close part of the loss-making position. Phone calls are a thing of the past and now Margin Calls are understood in the market as forced closing of a losing position brokerat reaching the remaining amount on the deposit level Stop Outwhich is expressed as a percentage of the required collateral.
When is the Margin Call?
The concept of Margin Call is inextricably linked to the concept of leverage. At first glance, everything looks quite complicated, but do not be afraid of it. Let's explain the process with a simple example.
So here we are:
- deposit 5000$
- leverage 1:100, which was provided to us by the broker
- the total amount of the deposit was 500 000$, of which 5000 also belong to the trader and 495 000 to the broker
- a deal with collateral is open 1000$
- as a result, the funds (equity) in the account are 5000 - 1000 = 4000$
- the standard lot on is 100,000 units of currency. In our case, $1,000 of that belongs to the trader, and $99,000 is the broker's money provided by the leverage.
Suppose, on an open trade, the price goes in the wrong direction and the loss starts to grow. The trader did not use the Stop Loss, so the loss continues to increase. At what point will the Margin Call occur? The answer is simple: at the moment when the amount in the account becomes equal or less than the margin amount, in our case 1000$. In numbers:
5000$ (initial amount) + 495 000$ (leverage) - 4000$ (loss) = 496 000$ (on account closing)
Of these, 495 thousand are returned to the broker, and 1 thousand remain on the account. As you see, the broker does not lose anything in case of his trader's loss and does not gain anything, except for commission. All risks are borne solely by the trader. It should be also noted that there can be a situation when the amount on the account is less than the calculated one. This occurs due to sharp market fluctuations. When a Margin Call is triggered, the loss is fixed but the price has managed to move further during those milliseconds.
P.S. There are also slang expressions in the traders' community such as "the stop-out was taken" and "Kolya Morzhov came". This is the triggering of a Margin Call.