By: Terry Allen

You will find that margin calls will be one of your biggest headaches when you start Forex trading and you must try to avoid them at all costs. You must learn to minimize, if not, totally eliminate these debilitating events as one of your top priorities.

Your Forex broker will generate a margin call when your useable margin drops to zero which means that you do not have enough equity to support your open positions. At such times, you will witness all your open trades closed immediately. If you had any positions open that were in negative territory, then you will automatically experience losses.

You will then have to rebuild your confidence and motivation to start trading again. This can sometimes be quite difficult because margin calls can be gut-wrenching experiences.

Margin trading can be a very effective tool because it allows you to exploit Forex leverage, which enables you to open positions valued at significant worth with just a small deposit. For instance, if your broker has provided you with leverage of 400 to 1, then you could trade a position valued at $400,000 with just a deposit of $1000.

However, there are risks associated with using leverage should price turn against your positions. In the worst case, a margin call will be issued by your broker and all your open positions closed. How can you avoid these events?

You need to adopt risk and money management strategies that will ensure that you do not overtrade by exposing your equity to unacceptable levels of risk. You must learn to control your emotions and especially not let your trading decisions be affected by greed. This can easily happen because the enormous daily turnover associated with Forex of billions of dollars, can readily influence your mind by tempting you to make unsubstantiated large gambles.

In addition, you must realize that Forex is very dynamic in nature and can produce periods of extreme volatility which are much higher than those experienced by other markets. The combination of high volatility and leverage can be very dangerous and can easily cause you to overtrade if you are not careful.

This is one of the main reasons why so many novices obliterate their account balances so quickly. If you do not keep your trading tightly controlled under these conditions, then this is a certain way to generate margin calls. You can neutralize these effects by using sound risk and money management concepts.

Basically, you must limit the amount of your account that you will risk per trade. For instance, you must appreciate that there is a big difference between risking 2% of your total account and 10%. In the former case, you would only lose about 17% of your total account if you suffered ten consecutive losses. Under the same conditions, you would lose about 66% if you risked 10%.

If you use the lower risk per trade, then you will definitely minimize margin calls.