8 FOREX TRADING MISTAKES THAT COULD RESULT TO MARGIN CALL.

I don’t forget in a hurry the day I got a Margin Call on my Forex account. It was a beautiful trading day like many others that had come and gone. I would even say the Margin Call I got then (April 2007 to be precise) was a blessing in disguise. Why, you may want to ask? Truth is I had called the few friends I had then to solicit for funds injection into my Forex account. I had also promised them they would get back their money with interest in 3 months. I thought I had known all there was to know to start pulling in massive profits. But the 3 months had not arrived when all I had was wiped out. I was still banking on the promises made by my friends (although they never bothered asking if I still needed the money) when I got the much talked about Margin Call, I had placed a few trades that week and decided to trade without stop loss orders. It worked the first time and again I thought to myself “why then should I be bothered with?”

 

Unknown to me there were several issues about forex I did not know yet. But it happened! You might have heard it said: before, especially by law enforcement agents that ignorance of the law is no excuse. Even the Almighty God Himself already made it clear when He said “My people perish for lack of knowledge”. The bottom line I got a Margin Call and lost my initial trading capital. To trade real money again, I had to wire money again to my preferred broker.

 

Now to the BIG question which is the subject of our discussion in this edition: “What are the reasons I got a Margin Call in my first trading account?” To answer the above question, let us once again understand Margin for what it really is.

 

Margin trading is one of the best things to ever happen to online forex trading as well as one that is greatly abused by majority of newcomers.

Margin is the amount required of you to deposit with your broker to serve as collateral which enables you to access leverage (Leverage has been defined and explained as a loan in an earlier edition of SDE!). In other words, Margin is the equity or amount of money or security you need to deposit in order to be able to access or trade with a larger amount which you ordinarily wouldn’t have been able to access if you had been asked to provide all the money.

 

Let’s assume you have opened a Forex account with a broker and you deposited $500. Depending on the range of leverage your broker offers and what you choose, you can use the meager $500 to control a standard account worth $10,000. you may decide to only go for a $100,000 mini account or even $1000 micro account. Have I told you that there are basically 3 Categories of Forex Accounts? Yes; most brokers today offer 3 Forex Account Categories Micro, Mini and Standard Accounts or Lots. So, while still practicing or paper trading you ought to have determined how much of your real money you would want to use to test the volatile waters of the forex market. Let us assume also that you have chosen a leverage of 100:1 for each account. This being the case, you will be able to only operate micro and mini accounts. This is because 100:1 leverage means you will provide 1 % of the entire money required to trade 1 lot of any account category of your choice (although brokers have fixed required minimum deposits they accept to open an account with them, same as banks). Applying this to the 3 different account sizes we have above: 1% of$100,000 $1000, while 1% of $10,000 = $100 and 1% of $1000 = $10.

 

What this means again is that on 100:1 leverage, $100 will trade one $10,000 mini account (1 Mini Lot), $10 will trade one $1000 micro account (1 micro lot) while you will need a minimum of $1, 000 to be able to trade 1 standard lot size of $100,000. And since you only deposited $500 you might not trade a standard lot except you increase your leverage to 200:1 or 400:1 (which of course is very dangerous and too risky) or you simply wire more money to your broker.

 

Now back to my story. What were the reasons I got a Margin Call so soon? Before answering that, let us first understand what a Margin Call is: Margin Call occurs when your broker notifies you that your margin deposits have fallen below the required minimum level because an open position has moved against you. Your positions could be partially or totally liquidated should the available margin your account fall below a predetermined level or percentage. You may not receive a margin call before your positions are liquidated or closed meaning all your trades would have been close returning only the little balance you have left which may no longer be able to open a position based on previously accepted leverage.

­

For Example: Let’s say you opened a Forex account with $500. You open 3 mini lots of the EUR/USD, with a margin requirement of $100. The amount you have opened 3 mini lots of EUR/USD with is now active in the trade and is called Used Margin or Margin in trade. Usable Margin or Core Equity is the money available to open new positions or sustain trading losses. Since you started with $500, your Usable Margin is $500. But when you opened 3 mini lots, which requires a margin requirement of $300, your Usable Margin is now $200 (Balance/Equity/initial Capital/Opening Margin MINUS Used Margin/Amount in trade).

 

If your losses exceed your Usable Margin of $200, you will get a Margin Call. I believe this makes it clear now. And if you would like to trade again with the remaining balance, you either put in more money or request for more leverage (more leverage is not advisable though) or better still start all over with micro lot sizes of between 0.01 and 0.09 (which is better for you anyway because that is where you should have started in the first instance).

 

But what could lead To Margin Call? I discovered 8 factors that led to my Margin Call as follows:

1.      I was ignorant of anything called News Events: most ignorant technical traders often have their trading accounts badly damaged if not wiped out: during news events releases. I therefore recommend that you get familiar with Economic Calendars even if you don’t like trading them. At least be aware of the time of the economic releases. Check out the following websites for this: www.forexfactory.com www.forexpeacearmy.com. www.fxstreet.com, and www.nalra4gold.com for Free News Trading schedules and signals.                                 

 

2.      I was over trading: Most other ignorant traders often over trade in any of the following ways: opening more positions than they should, not knowing when they have exceeded their trading limits/goals. I will recommend trading only one position at a time as a beginner.

 

3.     I had no trading system: one of the worst things that I can happen to a trader is to chase after pips of dollars without a proven system. Many have resorted to the use of robots and still go from place to place in search of anything, just anything that is claimed to make 1000pips a day. To succeed in trading you need a proven and tested decent trading system.   

 

4.      I had no trading plan: a plan gives you the road map to your destination. When you have no plan you will surely not know when you miss the way.

 

5.      I only heard you should use stop loss order but did not know where to place it and have a higher probability for profits: it is one thing to place stop loss orders and yet another thing to know where to place them in order to avoid being stopped just before price resumes in your analyzed trend and entry direction.

 

6.      I did not know how to monitor my margin account: If you do not know when your account is running into Margin Call you certainly will not know when you should not your losses.       

 

7.      I did know how to identify and ride with the market trend: Your trading system should be able to tell you how to identify new market trends, trend corrections and trend reversals.

 

8.      I was allowing maximum draw down on my account: when your account is drawn down by say 50% in one trade, you should know that it will not take you making a profit of 50% to return to your previous balance. It will rather take you 100% profit in your remaining balance to return to your original trading balance before the account was drawn down. Many accounts get wiped out in days because of this draw down mistake.      

 

The above 8 Mistakes put together resulted in the. Margin call I got as a complete novice trader. So watch them carefully so that what happened to me does not happen to you. “A wise man learns from the-mistakes of others, but a foolish man repeats his mistakes over and again”

 

In a subsequent edition I will be giving you tips on how to avoid ever getting a Margin Call in your forex trading career. Someone once asked me if I will ever lose N1 million in forex trading, and my reply was an unequivocal NO because I now know what it takes to lose one’s trading account and how to make sure it doesn’t happen.

         This is to your trading success!

 

Comments

  1. thank you so much for the valuable info… I wanna test the Forex waters but still afraid to have a real account.. I just have a practice account at this time…I don’t have much money, i can’t afford to lose my little savings by making mistakes..

  2. thanks mate

  3. Not the best idea in the world, but it may work!

Speak Your Mind

*