Margin Call Explained: What It Is and How to Avoid It

A margin call is one of the most feared events in trading — it's the moment when your broker or exchange tells you that your account doesn't have enough equity to support your open positions. Understanding margin calls is essential for anyone who trades with leverage.

What Is a Margin Call?

A margin call occurs when your account equity falls below the required maintenance margin level. When this happens:

• In traditional markets: Your broker contacts you and demands that you deposit additional funds within a set timeframe (usually 2-5 business days)
• In crypto markets: The exchange typically liquidates your position automatically — there is no "call" or grace period

The term "margin call" originates from the days when brokers would literally phone their clients to demand additional funds.

How Margin Calls Are Triggered

The Math Behind It

Let's walk through an example:

You deposit $10,000 as margin

You open a $100,000 long position (10x leverage)

Maintenance margin requirement: 5% = $5,000

The price drops 5%, and your position loses $5,000

Your equity: $10,000 - $5,000 = $5,000 — at the maintenance margin

Margin call triggered!

Margin Level Formula

Margin Level = (Account Equity / Used Margin) × 100%

• Above 100%: Safe
• At 100%: Margin call level
• Below 100%: Liquidation territory

Margin Calls in Crypto vs Traditional Markets

Traditional Markets

• Grace period (2-5 business days) to add funds
• Broker may call, email, or send platform notifications
• You can deposit more funds or close some positions
• If you don't act, broker liquidates positions at their discretion
• You may still owe money after liquidation (no negative balance protection in many cases)

Crypto Markets

• No grace period — liquidation is automatic
• Exchange's liquidation engine closes your position immediately
• Faster liquidation due to 24/7 market volatility
• Most exchanges have negative balance protection (you can't owe more than your deposit)
• Some exchanges use partial liquidation to reduce position incrementally

10 Strategies to Avoid Margin Calls

1. Use Lower Leverage

The single most effective way to avoid margin calls. 2-3x leverage gives you significant buffer.

2. Always Set Stop-Losses

A stop-loss closes your position at a predetermined loss level — before the margin call level.

3. Monitor Your Margin Ratio

Most platforms show your margin level in real-time. Keep it well above the maintenance level.

4. Keep Reserve Capital

Don't use your entire account as margin. Keep 50%+ as a buffer to absorb losses.

5. Use Isolated Margin

Limits your exposure per trade. Even if one position is liquidated, your other funds are safe.

6. Diversify Your Positions

Don't put all your margin into one trade or one asset.

7. Avoid Trading During High Volatility

Events like FOMC meetings, CPI releases, and crypto token unlocks can cause sudden price movements.

8. Scale Into Positions

Instead of opening a full position at once, enter in smaller portions at different price levels.

9. Monitor Funding Rates

In crypto, high funding rates on perpetuals mean high costs for holding positions and can signal market extremes.

10. Take Profits Along the Way

Reduce your position size as it becomes profitable to lock in gains and reduce risk.

What to Do When You Get a Margin Call

In Traditional Markets:

Deposit additional funds immediately if you believe in the trade

Close losing positions to free up margin

Reduce position sizes to lower margin requirements

Don't ignore it — the broker will liquidate at unfavorable prices

In Crypto (Pre-Liquidation):

Add margin to the position (if using isolated margin)

Close part of the position to reduce exposure

Close the entire position to prevent further losses

Accept the liquidation if you can't or don't want to add more capital

The Psychological Impact

Margin calls create immense psychological pressure. Traders often:

• Make irrational decisions under stress
• "Double down" by adding funds to losing positions
• Experience revenge trading (trying to win back losses)
• Develop fear of trading after major losses

Build a plan BEFORE you trade so you know exactly how you'll respond to adverse movements.

*Disclaimer: This content is educational only, not financial advice. Margin trading involves substantial risk of loss.*