What are Margin Calls?
Margin Call is a warning that equity or capital is barely sufficient margin required to maintain open transactions. Therefore, a margin call is basically a warning for us to top up or deposit. Or if we open several deals at the same time, we can close some of them so that the remaining margin is sufficient to maintain the remaining transactions.
What happens if we ignore the warning?
When a margin call warning is given, it indicates that the trade we opened is losing a large amount, at least as a percentage of the capital used. If the margin call is ignored, it is very likely that the losses from the transaction will continue to swell and make the trading margin completely exhausted or not enough to maintain a transaction. This means that our transactions that are losing will be closed by force (stop out).
Margin Call warnings are given in accordance with the policies of each broker. Each broker sets a different margin call level. There are brokers with margin call levels of 100%, 50% or 70%. A margin call level of 100% means that a margin call warning is given when the equity is equal to or lower than the margin requirement. Meanwhile, a margin call level of 50% means a margin call warning is given when the remaining equity is 50% greater than the required margin. Because of its relationship with margin requirements, the margin call level depends on the size of the leverage used, the lot size and contract size of the instrument being traded.
If we experience a regular margin call or loss, where does our money go?
Profits from trading are referred to as capital gains. The profit is the difference between the purchase price and the higher selling price. While the loss condition, referred to as capital loss, is a loss due to a selling price that is lower than the purchase price. These gains and losses are the result of market mechanisms. When prices keep changing all the time, when conducting normal transactions in a business for profit or loss.
In conventional business, when we are profitable, we basically earn the money of other people who buy the products we sell. Meanwhile, when we lose, the money is also taken by others. This mechanism is actually not much different from forex trading or other financial asset transactions. The difference is, the profits we generate through forex trading are obtained from liquidity providers or even brokers if the broker is a market maker. And conversely, at the time of loss or loss, our money is taken by them.
When we are profitable, we buy at a low price to the liquidity providers and sell it back to them at a higher price. So that liquidity providers “lose” because they sell at a low price but buy it back when the price is more expensive. However, when we lose, we buy at a high price from a liquidity provider and sell it back when the price is lower. So the liquidity providers sell us a high price and buy it back when the price is lower.
However, even if the liquidity provider deals against us, it does not mean that they are actually losing when we are profitable or vice versa. Because liquidity providers serve many traders with different decisions. On the one hand there are always profitable traders and on the other hand there are traders who are losing. So, it’s hard to say that liquidity providers win when we lose and they lose when we win. Because the mechanism that occurs is very complex, also because there are many things that we don’t know for sure.
Margin call or MC is the biggest concern of a forex trader. If a trader experiences MC, it means that the deposited capital on the trading account has run out, so there is no trace of it so they can no longer trade, unless they have to deposit another amount of money. But now many traders are curious about where the money will go if it gets hit by MC. There are two answers to this question that are widely known by the trader audience, it’s just that this is an open secret, so sometimes novice traders don’t know where the money affected by MC goes in forex trading.
1. MC’s Money Goes to the Broker’s Cash
If you register with a dealing desk broker, if you are profitable, the broker will lose money to pay the trader’s profits, conversely if the trader loses, the money will belong to the broker, including if the margin is called. For forex brokers who are already licensed, they will not commit any fraud on trader transactions because in the end the trader will lose and the MC himself will do nothing. However, there are also crooked bookie brokers, especially those who do not have a license from a forex standardization agency, so traders must be careful because the broker may deliberately create an MC trading account by manipulating the prices on the chart because the money will run into the broker’s profit.
2. MC’s Money Belongs to the Market
Meanwhile, if you create a trading account with a non-dealing desk broker, the trading capital affected by a margin call will belong to the market. Trading mechanisms like this can be found in various other assets, so traders must implement a good strategy with measurable risk management so they can avoid MC when trading. The market or the forex market is very big so don’t ever try to fight the market trend which means catching a falling knife.
