Understanding what a margin call is is the first step in knowing how to avoid one. Many traders tend to focus on other aspects of trading such as stop loss or entry price levels, but little thought is given to other important elements such as margin requirements, maintenance margin requirements and so on.
Margin call is when maintenance margin falls below a certain limit.
One of the biggest reasons why a trader would be hit by a margin call is partly because of not knowing what causes a margin call and therefore allocating trade sizes without a knowledge of margin requirements.
A margin call occurs when a trader's equity falls below the minimum maintenance margin requirement. It is simply the broker's demand for the investor to top up their account to meet the minimum margin requirements. Although most of this is now automated and you won't really be getting a call from your broker. In your NAGA account, you can easily check your margin level in real time.
Every instrument that you trade on margin is subject to the initial margin, which is the collateral that you post to trade on margin and the maintenance margin (available funds) that you must have in your account at all times to keep your position active in the market.
Using stop loss to avoid margin calls.
A stop-loss order is basically a stop order sent to the broker as a pending order. This order is triggered when the price moves against your trade’s direction. For example, if you were long on AAPL at $100, you would set your stop loss at $95.00. This means that when AAPL's price falls to $95.00 your stop order is triggered and your long position is closed for a $5 loss. Now imagine trading without a stop loss order in this example and APPL's price continued to fall. Sooner or later, depending on the position size, your account would trigger a margin call.
When using stop-loss orders, traders should bear in mind that the margin requirements remain the same. Meaning, if you were trading one lot in S&P500 futures, and the margin requirement was $500, then regardless of whether you use a stop loss order, the $500 margin is locked in. You also need to have a healthy maintenance margin as well.
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