How to Avoid Margin Calls In Forex
The Forex market is volatile and involves difficult to imagine volumes of daily trades. While you can make thousands overnight, it is equally possible to empty your trading account within seconds. How can this happen? Who is responsible? What are the ways to avoid such misfortune? Let's start with margin calls.
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Margin calls are one of those evil things in forex that you must avoid at all cost. Your risk management plan has to include ways to minimize if not completely avoid the devastating decisions that lead to margin calls.
Margin Concept
While financial banks, organizations and cooperation have millions to trade with, the average individual investor hardly has thousands to spare. In order to give us opportunity to trade forex alongside with our powerful opponents, forex brokers provide traders with something called "margin". Basically, the idea is that the broker gives a huge short-term loan, while the investor only needs to deposit about 1% of the actual sum traded. Sounds inviting, however, there is a definite dark side to margin!
Margin Calls
In order not to get your trading account into negative balance and not to owe a huge amount of money to the broker, there is something called a "margin call". Once your usable margin drops to zero, all of your open trades automatically close up and in case you had any open positions with negative balance, you automatically lose money. Once this happen, you not only lose your trading balance, but also a huge chunk of your self-esteem. It takes time to find enough confidence and motivation to return to trading again.
Avoiding Margin Calls
1. Trusted Broker
Take time to choose the right trustworthy broker to avoid getting too many margin calls.
2. Have Enough Balance in the Account
Always trade what you can afford to lose and never put all of your savings into forex. However, with that being said, it is important to maintain a healthy account balance in order not to hit margin calls every 5 minutes.
3. Concentrate on the Market
Stay constantly updated and in tune with the market. Currency prices are very explosive and since huge sums of money are involved, a seemingly predictable situation can turn into a complete disaster. Your best way to survive is to stay focused to avoid getting smashed by the margin calls.
4. Use Risk and Money Management
Practice healthy risk and money management to ensure that you do not overtrade and put your money to unacceptable levels of risk.
5. Don't be Greedy!
Forex trading is associated with billions of dollars and this can seriously become a vivid temptation. Be aware of the first symptoms of greed and avoid gambling at all cost!
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