A. Just for interest. A ‘Margin Call’ is an automatic instruction to close out your trades when you have insufficient funds in your portfolio…
The reason why there are ‘Margin Calls’ is a safety mechanism for both you and the broker.
This is just in case your portfolio goes in the negative (red) where you stand a chance to lose more money than what you have in your account.
I have three golden rules to avoid the pesky margin calls.
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Golden Rule #1: Trade smaller
Make sure you take smaller trading positions, with a portfolio size of around R5,000.
This way you can take on more trades, without being over exposed in any one trade.
Golden Rule #2: Deposit more money
If you want to trade with larger positions, then you’ll need to deposit more money into your portfolio.
I would suggest a minimum R10,000 portfolio to start with.
Golden Rule #3: Take less trades
Each trade you take might need a deposit of around R750…
With six open positions could deplete your portfolio size to nearly zero….
And so, I would recommend you take less trades at any one time… You might be able to get away with having a portfolio of R5,000 and trading three to four positions at a time – maximum.
These three rules will definitely help you avoid receiving another ‘Margin Call’.
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Q. “Timon I’ve been following you for eight years, and finally I’ve decided to start trading. I have recently opened a Mr Price trade with the following specifics:
Stop loss R181.00
Take profit R226.00
I have a R15,000 portfolio which means I’m willing to risk 2% or R300.
Your calculator says I must buy 17 CFDs in order to risk R300…
However, when I look at the amount of money I must deposit it says it will cost me R710 to take the trade.
What am I doing wrong?”
A. Hi Jess, you are doing absolutely NOTHING wrong.
I have just checked with the calculator and have put the trading levels in Velocity Trader’s platform – and I get the same result…
Take a look below.
I can understand where the confusion lies though…
And that is whether the 2% rule applies to the risk (according to where your entry and stop loss is) versus how much money you need to deposit into your trade (Total Initial Margin).
When I am talking about 2% risk, it is not how much money you deposit but rather, how much money you’ll lose (of your portfolio) if the price hits the stop loss…
So yes, the total margin could be R710, which is 4.7% of your portfolio’s value…
However, you won’t risk the full R710. And that is because of where you place your stop loss…
In this case, if you buy 17 CFDs at R199 and you put your stop loss at R181.00, you will only lose R300 (2%) if the price hits your stop loss level.
So in the future, don’t worry too much about how much you’ll deposit when you enter a trade but rather what the SL Offset (Stop loss risk) in your trading platform tells you.
If you have a trading question you’d like answered in our Trading Tips Mailbag Q&A you can email me at email@example.com.
Analyst, Red Hot Storm Trader