Why is the margin call the investor's worst enemy?

We can call it "margin call", or in good French, "margin call", the result remains the same: it means that the capital has gone up in smoke. To avoid such a situation from occurring, it is better to take the necessary precautions…

Margin call and leverage:

The margin you have is the capital available in your account. It is the limit that you "must not exceed". If a trade goes badly, and you were not careful and "forgot" to put a stop, you can therefore lose all your capital. But in this case, the broker takes no risk and in principle, he does not intervene in your management.

The problem is quite different when using leverage. Let's imagine that, seized by an uncontrollable desire to win, we use leverage × 10, while the capital amounts to €1,000. Unfortunately, the value loses 10 % during the day. The latent losses are €1,000 (10 % × 10,000 = 1,000). That is, the entire available capital. And if there is no more capital, there is no more margin. And if there is no more margin, the broker will close the position so as not to take any risk by lending you money (you would then be in debt). But first, he will make a margin call and give you the “opportunity” to add capital and avoid closing.

So the more leverage is used, thet plus the available margin can easily disappear.

How to avoid stupidly burning your account?

Placing your stop is obviously the first “anti margin call” barrier. This is the first thing that comes to mind when we think about managing the risk of loss.

Leverage should also be used sparingly. For example, some stocks are eligible for the Deferred Settlement Service, and allow a × 5 lever. While the principle is interesting for boosting profits, you should never forget to be careful. This is all the more true if you multiply your positions.

It is also important to always ensure that the available margin never falls to 0, which can quickly happen. if latent losses are not slowed down, or even stopped. We understand here the whole interest of the expression. "cut your losses". Even if the result is painful, it is much preferable to a margin call. A diminishing capital can be recovered in the medium term. While a burnt account is simply lost.

The margin call is therefore the trader's worst enemy...

In trading, there are many things that can put a strain on investment capital. But the only one that indicates that we have nothing left is the margin call.

Can there be a more serious situation for the investor? No. This is why that everything must be done to avoid it by respecting not only the rules of common sense, but also a strict money management strategy.