Why You Should Never Meet a Margin Call: Exit the Trade Instead 

Content Details 

• Summary: This article explains why traders should never meet a margin call and instead exit the trade. It highlights the risks associated with margin calls, the importance of maintaining adequate risk management, and alternative strategies to handle losing trades without further increasing risk exposure. 

• Target Audience: Intermediate to advanced traders who use margin accounts and are looking for effective risk management techniques to protect their trading capital. 

Expanded Response 

Quote: "Never meet a margin call – get out of the trade." 

• Definition: A margin call occurs when the value of an investor's margin account falls below the broker's required minimum value. Meeting a margin call involves depositing additional funds or securities to bring the account back up to the minimum value. Exiting the trade means selling the assets in the account to cover the margin deficiency. 

Stages: 

• Initial Trade on Margin: You enter a trade using borrowed funds, increasing potential gains but also potential losses. 

• Price Decline: The value of the securities falls, reducing the equity in your margin account. 

• Margin Call Issued: The broker issues a margin call, requiring you to deposit additional funds or securities. 

• Decision Point: Instead of meeting the margin call, you decide to exit the trade, selling the assets to cover the deficiency and avoid further losses. 

• Example in SPX: As of now, the current price of SPX is 4400. Suppose you bought SPX at 4500 using margin, and the price drops to 4200, triggering a margin call. Instead of depositing more funds, you sell your SPX position at 4200, cutting your losses and avoiding further risk. 

• Practical Application: Traders should set strict risk management rules, including not meeting margin calls. This can involve setting stop-loss orders to automatically close positions before a margin call is triggered, maintaining sufficient cash reserves, and avoiding over-leveraging. 

Trading Strategy: 

• Risk Management: Use stop-loss orders and maintain a conservative margin level to avoid margin calls. 

• Position Sizing: Limit the size of your margin trades to ensure you can withstand adverse price movements without triggering margin calls. 

• Capital Preservation: Prioritize preserving trading capital by exiting losing trades early rather than risking additional funds. 

Risks: 

• Increased Losses: Meeting a margin call can lead to further losses if the price continues to decline. 

• Debt Accumulation: Borrowing more funds to meet a margin call increases debt and interest obligations. 

• Forced Liquidation: Failure to meet a margin call can result in the broker forcibly liquidating your assets at unfavorable prices. 

Indicators for Managing Margin Trades: 

• Stop-Loss Orders: Automatically close positions before a margin call is triggered. 

• Relative Strength Index (RSI): Identify overbought or oversold conditions to avoid entering trades that could lead to margin calls. 

• Moving Averages: Use moving averages to identify trend direction and avoid counter-trend trades that increase the risk of margin calls.