A Forex Margin Call is Something you SHOULD Experience
"To make it in the long run as a professional forex trader, you have to have experienced an account destroying margin call."
There, I said it.
Well the entire internet is writing articles on why you should avoid having a margin call at all cost, but as usual I'm going to buck the trend and say the complete opposite.
Forex trading in the retail environment that we all participate, is done entirely via a broker's leveraged margin trading account. Your forex broker essentially spots you a loan to make up the size differential required to trade forex.
It is in my humble opinion that unless you've felt the pain and embarrassment that comes with being margin called because you were too incompetent to manage risk effectively, then you will never learn.
Let's discuss the concept in the sections below:
What is a Forex Margin Call?
A forex margin call is essentially the forced closure of your open trades because you no longer have the required money in your account to hold the losing position with your broker for any longer.
It is your broker liquidating your positions because you don't have the required free margin to keep them running.
How to Avoid a Forex Margin Call
The simplest way to avoid a margin call is to not over leverage yourself and trade lot sizes that would see a large percentage of your account risked if the position was to move against you.
Thanks to leverage, you can literally risk your entire account on a single 25 pip move if you wanted to. But leveraged accounts also allow savvy traders to get their risk management percentages spot on.
It is recommended that you never risk more than 2% of your trading account on any single trade. This is managed by first determining your stop loss length and then doing the math required to work out your lot size to stay within the 2% risk band.
There are literally 100s of forex position size calculators online that you can put to use so you can't use the shitty excuse of "but I'm not any good at math".
The bottom line is that you have to keep your trading account well capitalised, cut your losses short and let your winners run. Trading is such a simple game when you put it like that.
However, I'm now going to rock your world...
Why I think you Must Experience a Margin Call
It's in my humble opinion that you simply must have felt the pain and embarrassment that comes with being margin called due to risk management incompetence, at least once.
Well you now probably think I'm either batshit fucking crazy or some sort of sadist that gets off on pain, but just hear me out here.
Let's be realistic for a second. New traders come to forex trading because they want to make money. Preferably easy money. If you have a bit more experience in this game, have an honest think back to your mindset when you first got into trading.
You don't want to think about boring stuff like risk management, you just want to think about the rush of a big win. As a result, you chase the feeling when things start to go wrong. Making rash decisions that usually means doubling down on losers in some sort of martingale system.
But martingale ALWAYS ends the same way: In a margin call. It might not be your first week, or your first month, or maybe even your first year. But it only takes 1 loser and it's all over.
After you've experienced the feeling of being margin called, you come to a crossroads because no matter which path you take, you just simply can't afford to lose money trading anymore.
Path 1: Stop losing money by quitting right there.
Path 2: Stop losing money by learning to manage your risk.
You'll never want to feel that hollow, disgusting feeling of being margin called again and will take 1 of these 2 paths. Those that take the 2nd are much better traders for having experienced it.
Trust me...
Peace.
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Upvoted. I'll be resteeming this now :]
Thank you good sir.
i have learned my biggest lessons by making mistakes, and i dont regret it one bit.
Hey mate,
Exactly the attitude to have. Turn every negative into a positive learning experience.
Sounds like someone has personal experience.
I agree with your conclusion, until you get the margin call you often dont manage risk in an appropriate way
It still burns haha...
But your long term learning is much higher with this approach, versus "book" learning
Yep - I experienced a margin call on an equities account way back in 2001. Not fun, definitely an experience you don't forget. Have not ever had one since.
Yep, that feeling is burnt into my mind too. A real crossroads moment man.