In order to continue to win in the Forex market, it is important to not only win often, but to know and understand how to take a loss as well. To put it simply, beginning traders often think they can overcome continuous loss with one big win, but end up losing even more in the end. Pro traders are able to minimize their losses by keeping track of their capital and protecting it from the maintenance margin (margin rate), margin calls, and loss cuts. The loss of all capital in Forex trading temporarily ejects you from the market, making the management of funds particularly important. If you keep a positive account balance, you can continue moving forward in the market and make more profit.
A maintenance margin (%) is the margin rate for the margin required to purchase currency. The higher the margin rate, the lower the leverage risk. In Forex trades where we place leverage on our purchases, we have to take care in managing our margins, and we use a maintenance margin to help us do that. It is natural to then wonder what the best margin rate is, of course. If the normal rate is 300%, then it can be considered safe; however, if the market moves against expectations then 300% could also be considered unsafe. Therefore, it is also important to be able to judge when to take a loss cut when the margin maintenance rate declines past a certain point. A declining margin rate is a sign of a losing trade, and a rate below 100% is a near definite sign that the trader has lost.
A margin call is a demand made by a Forex company (broker) on the trader to deposit additional funds into their account because one or more of the securities they have bought has decreased in value below the minimum maintenance margin. When and if that call will come depends on the broker. Called a loss margin, this point occurs when about 100% of the margin rate has been lost. If a margin call is made, that means that the trader’s losses have exceeded their account balance, and the extra capital is being billed to them. To avoid a margin call, it is important to keep a good margin rate, and think about the leverage you are placing on your money while you trade.
A loss cut is a compulsory settlement that is automatically carried out when a loss becomes too large. Because of the high leverage placed on Forex trades, there is a chance of complete loss of a trader’s current funds, resulting in a negative balance. These insufficient funds are what Forex companies charge for when a trade turns into a loss. During the Swiss franc Shock, many losses occurred, and loss cuts were made, bringing them up as a big problem in Forex at the time. Recently, there are many companies that adopt a “zero cut system” which does not charge a trader for the negative account balance when the negative balance is due to loss. Selecting a company employing this “zero cut” system is an extremely effective way of protecting your funds and managing risks.
If you set your margin rate high and then get a margin call and take a loss, then your main problem may be the proper management of your capital. It is best to maximize profit during a winning trade (as opposed to trying to raise your percentage of wins) and minimize your losses as best you can during a losing trade. In particular, when trading with leverage, depending on the amount of margin and leverage, it can be easy to hit a loss cut point or receive a margin call. Because it is easy to lose big on high leverage trades, it is important to prepare enough capital and choose the best leverage for your order lot.