Page 57 - Module1_Introduction_to_the_Forex_Environment

Module 1 – Lesson 11 – Leverage & Margin closeout

11. what can lead to a margin call and how to cover it?
If we combine all the causes of the margin call together into a list, the main reason that leads to the margin
call is the following: the use of excessive leverage with insufficient capital whilst holding onto losing trades
for too long when they should have been cut.

You can choose between 2 ways to cover the margin call:
▪ You can deposit more money into the account to increase your equity; or
▪ You can sell enough assets from your portfolio so that your equity balance meets the margin
requirement.

12. what are the best ways to avoid the margin call?
To tell the truth, proficient traders almost never experience margin calls. They manage their trades well
enough and apply different steps. Let’s take a closer look at them.

▪ First of all, monitor your account on daily basis. In addition, do not forget to use stop loss orders to
reduce your risk exposure. Effective money management increases your chances to avoid the margin
call.
▪ You might also consider that one of the best ways to avoid margin calls is not to use leverage. As
alternative, you can keep your use of margin at the low end of your borrowing limit. Hence you can
limit the leverage to no more than 10-20%. Thereby, you will have some leverage to improve your
performance in a risky market, yet enough to avoid triggering a margin call.
▪ Another step you can take is to review your portfolio composition. If you diversify your portfolio
across a broad range of shares or managed funds, you can potentially mitigate the risk of receiving
a margin call in times of high volatility.
▪ It is advisable to set your personal trigger. This means that you should keep additional liquid
resources at the ready if you need to add either money or securities to your margin account.

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