Margin calls

Margin Calls: A Beginner's Guide

Welcome to the world of cryptocurrency trading! You’ve likely heard about the potential for high profits, but also about the risks. One of the most important risks to understand when trading with leverage is a “margin call.” This guide will explain margin calls in simple terms, so you can protect your funds.

What is a Margin Call?

Imagine you want to buy a house, but you don’t have all the money upfront. You might take out a loan from a bank. The bank lets you borrow a certain amount, but they require you to put down some of your own money as a guarantee—this is called a “down payment” or “collateral.”

In crypto trading, “margin” is similar to that down payment. When you trade with leverage (using borrowed funds from an exchange like Register now), you're borrowing money to increase your potential gains. However, the exchange requires you to have a certain amount of funds in your account as collateral.

A margin call happens when your trade starts to move against you, and your collateral falls below a certain level. The exchange then *calls* for you to deposit more funds (collateral) to cover potential losses. If you don’t deposit more funds, the exchange will automatically close your position to limit their risk. This is often done without your permission, and you can lose your initial collateral.

Think of it like this: you borrowed money to buy a crypto like Bitcoin. If the price of Bitcoin goes down, the value of your collateral decreases. If it drops too far, the exchange will ask you to add more funds to maintain the required collateral level.

Key Terms Explained

• **Leverage:** Using borrowed funds to increase your trading position. For example, 10x leverage means you can control $100 worth of Bitcoin with only $10 of your own money.
• **Margin:** The amount of money you need to have in your account as collateral when trading with leverage.
• **Maintenance Margin:** The minimum amount of margin required to keep a leveraged position open.
• **Liquidation Price:** The price level at which your position will be automatically closed by the exchange to prevent further losses.
• **Margin Ratio:** Your current margin divided by the initial margin. A lower margin ratio indicates a higher risk of a margin call. See risk management for more details.

How Margin Calls Work: An Example

Let's say you want to buy $100 worth of Ethereum (ETH) with 10x leverage on Start trading.

• **Initial Margin:** You only need to deposit $10 (10% of $100) as margin.
• **Position:** You now control $100 worth of ETH.
• **Price Change:** If the price of ETH drops, your position loses value.
• **Margin Call Level:** Let's assume the exchange's margin call level is 8%. This means if your margin ratio falls below 8%, you’ll receive a margin call.
• **Margin Call:** If the price of ETH drops, and your margin ratio falls to 8%, the exchange will notify you that you need to add more funds.
• **Liquidation:** If you don’t add more funds, and the price of ETH continues to fall, your position will be automatically liquidated when the price reaches your liquidation price. You lose your initial $10 margin.

Avoiding Margin Calls: Practical Steps

1. **Use Lower Leverage:** The higher the leverage, the faster you can get margin called. Starting with lower leverage (e.g., 2x or 3x) is a good idea until you understand the risks. 2. **Set Stop-Loss Orders:** A stop-loss order automatically closes your position when the price reaches a certain level, limiting your potential losses. This is a crucial risk management tool. 3. **Monitor Your Positions:** Regularly check your margin ratio and the price of your trades. Most exchanges provide tools to help you track this information. 4. **Don’t Overtrade:** Don’t open too many positions at once, as this increases your overall risk. See trading strategies. 5. **Add Collateral Proactively:** If you see your margin ratio dropping, consider adding more funds *before* you receive a margin call. 6. **Understand Exchange Rules:** Each exchange has different margin call levels and liquidation rules. Read the terms and conditions carefully. Join BingX offers detailed margin explanations.

Margin Calls vs. Liquidation: What’s the Difference?

| Feature | Margin Call | Liquidation | |---|---|---| | **What it is** | A warning from the exchange to add more funds. | The automatic closing of your position by the exchange. | | **When it happens** | When your margin ratio falls below the margin call level. | When your margin ratio falls to 0% (or below). | | **Action Required** | You can avoid it by adding more collateral. | No action possible; your position is closed. | | **Result** | Avoids potential loss. | Results in loss of initial margin. |

Exchanges and Margin Trading

Many exchanges offer margin trading, including:

• Register now (Binance Futures)
• Start trading (Bybit)
• Join BingX (BingX)
• Open account (Bybit)
• BitMEX (BitMEX)

Each exchange has its own interface and rules for margin trading. It's important to understand these rules before you start trading.

Further Learning

• Leverage Trading
• Risk Management
• Technical Analysis
• Trading Volume Analysis
• Stop-Loss Orders
• Take-Profit Orders
• Position Sizing
• Hedging
• Trading Psychology
• Order Types
• Candlestick Patterns
• Support and Resistance

Margin trading can be a powerful tool, but it’s essential to understand the risks involved, particularly margin calls. Always trade responsibly and never risk more than you can afford to lose. Remember to explore fundamental analysis alongside technical indicators.

Recommended Crypto Exchanges

Exchange	Features	Sign Up
Binance	Largest exchange, 500+ coins	Sign Up - Register Now - CashBack 10% SPOT and Futures
BingX Futures	Copy trading	Join BingX - A lot of bonuses for registration on this exchange

Start Trading Now

• Register on Binance (Recommended for beginners)
• Try Bybit (For futures trading)

Learn More

Join our Telegram community: @Crypto_futurestrading

⚠️ *Disclaimer: Cryptocurrency trading involves risk. Only invest what you can afford to lose.* ⚠️