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2024/07
How to effectively handle a Margin Call?
No trader wants to face the issue of a margin call, but it’s almost inevitable in a trading career. If you haven’t experienced it yet, consider yourself lucky. However, it’s best to be prepared if you have faced significant drawdowns.
The market demands a tuition fee for learning, and experiencing a margin call can be part of that learning process. Here’s how to handle a margin call and deal with substantial losses effectively:
1. Take a Break from Trading
There are generally two types of traders when dealing with margin calls: those who prefer to take a break and those who try to win back their losses immediately. If you are the latter, it’s crucial to hit the brakes. Inappropriate courage can lead to further trouble. A margin call indicates that your trading strategy has issues that need addressing.
Taking a break from trading helps calm your emotions, allowing you to focus on solving the problems that caused the margin call. The break length depends on the individual but should be at least one trading week. Anything shorter might increase the risk of experiencing similar issues again. During this break, spend time with family and do things you enjoy.
2. Review and Diagnose Your Trades
After stepping away from the market, start diagnosing the problems. Here are some areas to consider:
- Time Frame:Examine whether you were using lower time frames (5 or 15 minutes) or higher time frames (4-hour or daily charts). Transitioning from lower to higher time frames often improves performance.
- Trading Frequency:High trading frequency can negatively impact performance. Consider reducing the number of trades from 15-20 per month to 5-10, and align this with daily time frames for better results.
- Risk Management:The key to successful trading is survival, not short-term profits. Control your risk to around 1% per trade. This way, even five consecutive losses would only reduce your account by 5%.
- News Events:Trading based on news is unreliable. Focus on technical setups at key levels instead.
- Risk-Reward Ratio:Avoid taking profits too quickly. Aim for setups that offer at least twice the reward relative to the risk.
3. Cut Everything in Half
When attempting to recover after a margin call, reduce everything by half. For example, if you risked 4% per trade, cut it to 2%. Also, halve your trading frequency. This conservative approach helps manage risk and reduce pressure.
Additionally, consider halving the capital you deposit into a new trading account. This reduction lowers your stress levels, leading to better trading performance.
4. Decide Between Real and Demo Accounts
After a break, you can deposit funds into a real account or continue with a demo account. There’s no one-size-fits-all answer. Some traders can treat demo accounts with the same discipline as factual accounts, while others find them less realistic and need more discipline. It depends on your personality and trading style.
Regardless of your choice, keep the account size small. For instance, if you plan to start with a $500 real account, practice on a demo account with a similar balance.
Conclusion
Experiencing a margin call is never pleasant, regardless of the account size. Most traders go through it at least once before achieving consistent profitability. Instead of dwelling on the loss, view it as a learning opportunity.
Reflect on your mistakes, identify the problems, and start afresh. By taking a break, reviewing your strategies, reducing risk, and deciding on the correct account type, you can recover from a margin call and improve your trading approach.
