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How to Avoid a Margin Call
A margin call occurs when the value of the assets in your trading account drops below a certain threshold, typically around 25-30% of the total value of the account. When this happens, your broker will request that you add more funds to your account to bring the margin level back up to the required minimum.
To avoid a margin call, you can follow these steps:
- Monitor Your Margin Ratio: Regularly check your account’s margin ratio, which is the ratio of the value of your assets to the amount of borrowed funds. Most brokers will provide this information in your trading platform or online account dashboard. Aim to maintain a margin ratio well above the minimum required by your broker.
- Diversify Your Portfolio: Having a diverse portfolio of assets can help mitigate the risk of a significant drop in the value of your overall account. This way, if one asset experiences a steep decline, the other assets in your portfolio may help offset the loss.
Example
Let’s say you have a trading account with $10,000 in assets, and you’ve borrowed $5,000 to leverage your trades. Your initial margin ratio would be 2:1 (10,000 / 5,000 = 2).
Now, let’s assume the value of your assets drops to $7,500 due to market volatility. Your new margin ratio would be 1.5:1 (7,500 / 5,000 = 1.5), which is close to the typical margin call level of 1.33:1 (25% of the total account value).Trade Now 
To avoid a margin call in this scenario, you could:
- Deposit additional funds into your account to bring the margin ratio back up to a safe level (e.g., depositing $2,500 to bring the account value back to $10,000 and the margin ratio to 2:1).
- Sell some of your assets to reduce the amount of borrowed funds and improve the margin ratio (e.g., selling $2,500 worth of assets to reduce the borrowed funds to $2,500 and bring the margin ratio back to 2:1).
- Diversify your portfolio to reduce the impact of a significant drop in the value of any single asset.
By following these steps, you can proactively manage your margin requirements and avoid a potentially costly margin call.
