CFDs (Contracts for Difference) enable trading on the upward and downward price movements of financial assets without owning them outright. One of the key features of CFDs is leverage – which allows traders to open trades of higher value than the deposit (margin) needed to open the position. While CFDs offer flexibility and the ability to control larger trade sizes, they also expose traders to increased risk – particularly due to leverage. One of the dangers of leverage is the potential for a margin call. You may have heard of it already, but in this article, we’ll go in-depth to explain what a margin call is, why it happens, and the scenarios that can occur if it does happen, to ensure you’re best prepared.
What is a margin call?
A margin call is a level when a trader will be prevented from opening further positions that increase their margin requirement. A margin call with ThinkMarkets occurs when your margin level falls below 100%. At this point, a trader will be unable to open new positions until their margin level is back above 100%. This could happen if the trader adds funds, closes open trades, or if the market moves back in their favour. These are some of the possible ways to respond to a margin call, which we will explore in more detail later in this article.
How is a margin call calculated?
The margin level is calculated by dividing the account equity (account balance plus or minus running profits and losses) by the margin requirement, multiplied by 100%.
To better understand how margin call is calculated, let’s look at a simple example:
You open a trade on EURUSD worth $30,000
With 30:1 leverage, the margin required is $1,000
Your account equity is $2,000
Margin Level = (equity ÷ margin) × 100%
= (2,000 ÷ 1,000) × 100% = 200% (This is safe)
If equity drops to $990:
= (990 ÷ 1,000) × 100% = 99% (Margin call triggered)
Why do margin calls matter?
Margin calls are warnings to help prevent your positions from being closed. With ThinkMarkets, you’ll be notified via email when your margin level reaches 100% and again at 75%. If it falls to 50%, all open positions in your account may be liquidated.
It’s important you acknowledge these warnings, as ignoring them means you run the risk of forced liquidations. Although we issue margin call notifications, they should not be relied upon. It is your responsibility as the client to monitor your account at all times.
Managing a margin call
If you find yourself receiving a margin call, it’s important you carefully consider your next course of action to ensure you protect your capital and avoid the risk of forced liquidation. There are a few possible outcomes that can occur based on the actions you take, so we’ll now go through each one to help you better understand which option may be best for you and your current situation.
Outcome 1: You add adds funds to cover the margin call
To help ensure your margin level returns above 100%, you decide to deposit additional funds. This is the simplest and least disruptive response. However, you should carefully consider whether you can afford this to avoid causing foreseeable financial harm by losing more than you can afford.
Example:
If your position requires $1,000 in margin and your equity falls to $900, you can add $100 to meet the requirement.
Outcome 2: You close some or all positions manually
You decide to close some of your other positions to reduce the margin requirement. This helps ensure you free up equity and helps bring the position with a margin call back to the 100% level, avoiding potential liquidation. This may be a better option if you’d prefer to avoid adding funds.
Example:
Closing half of another position might reduce the required margin by around 50%, potentially bringing your position back into the safe zone.
Outcome 3: You hope the market reverses
You decide to avoid depositing or closing other positions and hope the market moves back in your favour, restoring your margin level to 100%. This is a risky option – if the market reverses, losses may reduce enough to avoid forced liquidation. However, if it continues against you, your positions could be stopped out, resulting in further losses.
Example 1:
The market reverses and your equity rises from $900 to $1,000, restoring your margin level to 100% and avoiding forced liquidation.
Example 2:
Equity falls to $900 (margin level 90%). Market moves further against you, equity drops to $500, triggering forced liquidation.
Outcome 4: You take no action at all
You decide not to take any action, meaning that if your margin level continues to fall, we may start automatically closing your positions to try and restore your margin level. This should be avoided, as it locks in your losses and leaves you with no control over which positions are liquidated.
Improve your trading knowledge with our Academy
Now that you’re more familiar with a margin call and how it works, why not dive in head-first to ThinkAcademy? It offers a wide range of educational materials to help you learn trading, including articles and videos. And if you ever need help with any other trading-related queries, be sure to reach out to our client support team via live chat, email, or phone.