How to Avoid Margin Calls
Margin call is a warning feature given by the broker when the trader's equity is not enough to open a new position. Many things underlie the occurrence of margin calls. Starting from the ignorance of beginners who open and close positions, less thorough risk management, and market conditions that move outside the norm. Actually, margin calls are not really a dead line. Margin calls are actually presented by the broker as a savior so that the balance in the trader's account is not completely sold out. When there are insufficient funds to hold a position, the broker will provide traders with information in advance to make a decision.
How to Avoid Margin Calls
Have a Clear Trading Plan
Professional traders certainly have a strategy before entering the world of trading. A simple trading plan usually contains the selected pair, lot size, entry level, and stop loss (SL) level. Some traders who are more detailed also add take profit (TP) levels and risk reward ratios (RR) for each entry. It is important to underline, never enter the market without preparing a trading plan. Plunging into the forex market without a guide will make trading activities like gambling.
Use Major Pair
When trading forex, there are different types of currency pairs that traders need to be familiar with, including:
Major pairs, namely currencies that are paired with USD. Examples are EUR/USD, GBP/USD, USD/JPY, USD/CHF, and so on. Major pairs have a high volume of transactions and their movements are easier to analyze. In addition, there are also cross pairs, namely currencies of major countries other than USD. Examples are EUR/GBP, GBP/JPY, EUR/CHF, AUD/JPY, and so on. Although it is not paired with the US dollar, the cross pair has quite a lot of fans because the country of origin of the currency is quite influential on the world economy. Finally, there are exotic pairs that have currencies from developing countries. Examples of pairs include: USD/MXN (American Dollar/Mexican Peso), USD/TRY (US Dollar/Turkish Lira), USD/SGD (US Dollar/Singapore Dollar), and EUR/TRY (EURO/ The Turkish Lira).
For traders who are new to the forex market, major pairs are often recommended because of their more affordable spreads. Some brokers even offer a zero spread feature on the EUR/USD pair. With reduced trading costs, traders can focus more on calculating capital for each lot opened.
Discipline with Lot Management
A mistake that often leads to margin calls is a lack of understanding of lot management. This is closely related to the importance of making a trading plan that has been mentioned in the first point. If the trader's capital is limited, use micro lots or cents which require a smaller open position fee. If a trader forces himself to open a standard lot that is too large in size, then the potential for a margin call when the price moves against the position is unavoidable.
Control Your Emotions
All of the above tips on avoiding margin calls will be in vain if the trader does not have the courage to apply them. When the market moves against the prediction, get rid of the feeling of wanting revenge and quickly cover losses by opening new positions outside of the trading plan.
Instead of forcing yourself, you should take time to rest and evaluate the trading decisions that have been made. Forex trading does look simple because you just need to open and close positions, but behind that, there is a trading psychology that not everyone has.
Comments
Post a Comment