Margin calls (MC) often make novice traders afraid when trading. In one second, your funds can be siphoned off or expired because of Margin Calls. According to Investopedia, margin calls occur when the value of an investor’s margin account falls below the broker’s required amount. Trading experts believe that traders will generally experience Margin Calls. Thus, you must learn the right risk management and money management to deal with Margin Calls.
Check out the following right ways to deal with Margin Calls
In fact, you can deal with margin calls. However, you cannot eliminate the risk that might arise from MC. That’s why you need a surefire way to deal with the MC, by doing risk management and money management.
Risk Management
Having a qualified risk management basis should be important for novice traders. Risk is a consequence that you must face when entering the business, including trading. By mastering risk management, you can reduce the risk of doing business to maximize opportunities for profit.
In risk management tools, three ways can help you avoid MC.
1. Cut loss method
Immediately closing a transaction that is losing money is an action taken in the cut loss method. You must use this method so that you avoid the risk of greater losses. However, you should not just cut loss if only based on your feeling.
You must have a proven analytical base to take action when trading. So, do the cut loss objectively and rationally, so you don’t regret it later.
2. The switching method
What if there was a sudden and drastic change in price direction?
You can try to do the switching method, which is closing the losing position and taking a new position in the direction of the price movement. So, you can recover losses due to the previous transaction position.
However, this method is best if you are sure that the market is moving fast enough.
This method directs you to open a new position with a shadow of the risk of loss that might arise if the market reverses direction again. Thus, you need proper analysis and a high level of mental readiness to successfully carry out this method.
3. Averaging Method
This method is quite extreme. It encourages you to fight the market because it is based on the idea that the market is not always moving in one direction.
Three methods can be developed from averaging, that is:
- Pyramiding
You add open positions every time you make a profit - Martingale
You add a new position every time you experience a loss and double the number of transactions that can be attempted - Anti-martingale
This method is similar to pyramiding, but the number of transactions is doubled every time there are additional benefits.
However, the averaging method is high risk. Minimum-funded traders should not try this method.
Money Management
If risk management helps you take action immediately after a market movement occurs, then money management is part of your trading plan.
The right fund or capital management strategy helps you avoid massive losses as a trader. The main key is how you can limit the risk to a minimum. So, you can estimate the number of transactions that you can do with that much capital and the maximum risk of loss that may arise.
Apart from risk limitation, you can also set profit targets. Make sure the profit target is not smaller than the risk allocation.
For example, the risk per transaction is 5%, then you can set a profit of 6% to 10%. A comparison of risk and potential benefits is often known as the risk-to-reward ratio.
Finally, make sure you use a trading system that you are good at. This is important so that you can measure the accuracy of the trading system through a win-loss ratio, or a comparison of profit transactions and loss transactions.
Having good risk management will help you take appropriate responsive actions after observing market movements. Meanwhile, money management helps you control your financial condition so that you can stay in the forex trading business for the long term. Even if you experience successive losses, you can make a comeback and make a profit again.
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