What is Margin Call?

Margin Call is one of the most intimidating concepts in the world of leveraged trading. Many traders, especially beginners, may find themselves in this situation if they don't understand all the risks involved in trading on margin. In this article, we will take a closer look at what a margin call is, how it arises, how to avoid it, and give real-world examples.

Definition of Margin Call

A Margin Call or forced liquidation is a request by a broker to deposit additional funds into your trading account in order to maintain minimum margin requirements. This occurs when the value of assets purchased with borrowed funds falls to the point where your account equity falls below the margin requirement threshold.

When you trade using margin, you are actually borrowing money from your broker to increase the size of your position. This allows you to control a larger volume of assets than you could afford on your own funds alone. However, this increases both your potential profits and risks. If the price of assets falls, you may find that your losses exceed your capital and this leads to a margin call.

The mechanism for a margin call to occur

How it happens?

When the price of your assets declines and the total value of your positions falls below the minimum margin requirements (i.e., the minimum amount needed to maintain your position), the broker may send you a margin call notice. This notice requires you to deposit additional funds or sell some assets to rebuild your balance.

Notices from brokers

Most brokers send margin call notifications via email, SMS or through the platform you use to trade. However, it is worth bearing in mind that if you do not respond to such a notification in time, the broker has the right to automatically close your position to avoid further losses.

Example:

Let's say you have $10,000 in your account and you decide to trade on margin, increasing your position to $20,000 by borrowing $10,000 from your broker. If the asset you bought drops in value by 30%, the total value of your position becomes $14,000. Your equity is now only $4,000 ($14,000 - $10,000 debt), which may be below the broker's margin requirements, and you will receive a Margin Call.

How do you avoid margin calls?

1. Use less leverage

The higher the leverage, the greater the risk. Limit your use of leverage so you don't have to add funds when the market falls.

2. Monitor your positions regularly

Keep track of changes in the market and the state of your account. Use stop orders to minimise losses and protect your capital.

3. Add capital in advance

If you see that your position is approaching the margin level, fund your account in advance to avoid a Margin Call.

4. Diversify your portfolio

Don't keep all your funds in one position.

Diversification will help reduce your overall risk and avoid sharp losses in one area.

Case Studies

Example 1: Stock Market Crash

During major market crashes, such as the 2008 financial crisis, many traders faced margin calls. The value of their assets declined rapidly and they had to either add capital or sell assets at low prices, resulting in even greater losses.

Example 2: Cryptocurrency trading

In the world of cryptocurrencies, the margin call situation is even riskier due to high volatility. For example, in 2021, when bitcoin plummeted from $60,000 to $30,000, many leveraged traders received a Margin Call and lost their assets.

Conclusion

A Margin Call is not just a warning, it is a signal to action. It reminds traders that leverage carries significant risks. Trading on margin can be a profitable strategy, but only with a conscious approach and strict risk management.

To avoid margin calls:

• Use moderate leverage.
• Constantly monitor the markets and your account balance.
• Fund your account early if necessary.

Be attentive to your strategy and manage your risks intelligently to avoid unnecessary financial losses!