Margin call – what is it?

Modern exchanges allow traders to use leverage to increase the amount of capital in their trades.

Leverage is the ratio of the amount of collateral to the amount of borrowed funds provided by a cryptocurrency exchange. For example, if the leverage ratio is 1:10 and you have $100 as collateral, the exchange will provide you with a loan of $900, resulting in a total position size of $1000, which is 10 times your collateral of $100.

Since the exchange is providing borrowed funds to the trader, it charges fees for the use of the funds and has the right to close the trader's position at a loss if their balance falls below a certain threshold. A precursor to this situation is called a Margin Call.

Margin Call refers to a demand for additional funds to be deposited with the exchange to maintain an open position. Failure to meet this requirement can result in the closure of the position and realization of losses.

There are three possible actions when a Margin Call occurs:

• Deposit the required amount into the account. If the price continues to move against the trader, this can result in significant losses.
• Take no action and if the prices start moving in the desired direction, the trader may recover and make a profit.
• Take no action and receive a Stop Out.

A declared Stop Out will close the player's positions, and the exchange will collect the necessary funds from the account.

To avoid Margin Calls, the following measures can be taken:

• Maintain a safety cushion of additional funds in the account.
• Familiarize oneself with the rules of margin trading.
• Trade with only one's own funds without relying on loans.