Forex Margin Call Trading Illustration
This illustration explains the term margin call in forex trading so that you who will start forex trading know exactly what to do with their activities. Among other things is to set the number of trading positions so that your account is not subject to margin calls by your broker automatically. Because if your account is hit by a margin call even though the potential for reversing the price is very large, then you will be very lost.
Margin call itself is the closing of your trading position by the broker automatically because the guarantee fund in your trading account is up.
For more details, let’s look at the illustration of buying and selling property that uses the following loan system.
Before proceeding to discuss the illustration of a margin call, it should be said that I also experienced the name margin call when trading forex. Understandably this happened because of my lack of knowledge at that time regarding the margin call itself.
Let this not happen to you, I will give a clear picture of forex margin call trading through the following illustration of buying and selling property.
Illustration of Margin Call on Property Sale and Purchase Transactions
Suppose you are someone who has a business buying and selling property that has a business scheme, you buy a property from someone else then you break it all out then you sell it again to your customer.
At one point you find a property that costs 200 million but because your capital at that time was only 100 million then you borrowed the remaining 125 million in capital for your friend.
How come the loan is 125 million, the purchase price of the property is only 200 million? Yes, 25 million is used to remodel the property so that it has a higher selling value.
And you dare to borrow your friend because you believe that if you buy and renovate the property, there is a possibility that you can sell it for another 400 million.
Then you dare to borrow the remaining capital from your friends. Because your friend is a good person, your friend doesn’t take a penny, but your friend doesn’t want to lose because of your mistakes. So that you and your friends make an agreement.
If it turns out the value of your property is down due to macroeconomic conditions, your friend has the right to forcibly sell your property at a price of 125 million in accordance with what you borrowed earlier if it turns out that the price is the best price when macroeconomic conditions are not good aka the monetary crisis.
How come the property price is down?
The selling price of your property turns out to be too high for people who want to live in the area and because you still hold a selling price of 400 million then for a number of years your property has not sold well.
It turns out that a storm of crisis comes, there is only one person who bid for your property as much as 125 million and your friend knew about it, then your friend insisted on selling the property to the bidder for fear that your property would not sell even 125 million if economic conditions continued to deteriorate.
Forced sales by your friend happen because your friend does not want to lose the money he lent you earlier.
Now because of the forced sale, you lose 100 million capital.
Maybe the loss will not occur if you are not too stiff with the selling price of the property. If in a few years there are people who bid 275 Million before the economic crisis occurs you should sell the property and pocket 50 million profit or 50% of your total capital of only 100 Million.
This loss will not occur if you are not greedy and apply a risk management system .
If in forex trading we do not apply risk management, the chances of getting a loss is very large.
Okay, let’s now connect between illustrations of buying and selling property with forex trading.
When your friend forcibly sells the property you have, this condition we call a margin call in forex trading. Because your broker also doesn’t want to lose when the price of the currency pair you buy / sell has an increase / decrease that exceeds your balance limit.
When you only have 100 million capital but can buy property for 200 million plus a renovation fee of 25 million then you are actually using leverage of 1: 2.25.
Forex trading is a High Risk High Return business, when you are exposed to margin calls or forced sales, your losses can reach 100% if you do not apply risk management. But if you can make a profit then your profits can reach tens or even hundreds of percent.