Understanding Margin Calls
A margin call occurs when an investor’s margin account, which consists of assets purchased with borrowed funds, falls below the required maintenance level.
This level is typically a combination of the trader’s own funds and borrowed money.
When a margin call is triggered, the broker requests the investor to deposit additional funds or securities to meet the minimum requirement and continue trading.
Adding Funds or Closing Positions
A margin call is typically issued when funds are at risk of depletion, often due to a losing trade.
Traders have the option to add more funds to their account to avoid liquidating their position.
However, if adding funds is not feasible, closing the position becomes inevitable. In such cases, the brokerage has the authority to close the position without the trader’s consent.
Using Stop Orders to Manage Margin Call Risk
Traders can sometimes calculate the specific threshold at which a margin call will be triggered.
They can use stop orders to manage their risk exposure and prevent margin calls from being activated.
Stop orders are instructions to buy or sell an asset on a trading platform, including cryptocurrency exchanges. They are designed to limit losses during periods of high volatility and extreme price swings.