What to Do After a Margin Call?

When Does a Margin Call Occur?

A margin call happens when the balance in your trading account decreases below the minimum required margin level. This situation usually arises from significant losses in trades, such that the available capital in the account can no longer cover the ongoing losses. In these circumstances, the broker will ask you to deposit additional funds to prevent further losses. If this request is ignored, the broker will automatically close your open positions to prevent the balance from decreasing further. Risk management and using appropriate trade sizes play a crucial role in preventing this situation.

Formula for Calculating Margin Call

Calculating a margin call in financial markets is based on the margin level ratio of the account. This ratio is calculated by dividing the equity by the used margin and multiplying it by 100. The formula is as follows:
Margin Level = (Equity / Used Margin) × 100
When this ratio reaches a specified level set by the broker (usually 100% or less), a margin call is triggered.

Understanding Call Margin with an Example

Let’s say you have a $1,000 balance in your trading account and decide to enter a trade worth $10,000 using a 1:10 leverage. In this case, your $1,000 is used as margin. Now, if the market moves against your prediction and your loss reaches $900, your account balance will decrease to $100.
If your margin level falls below the minimum margin level set by the broker (usually 100%), the broker will ask you to deposit more funds. If this is not done, the broker will automatically close your open positions to prevent further losses. This situation is known as a margin call, and it typically occurs due to poor risk management or the use of high leverage.

Advantages and Disadvantages of Margin Call

Advantages of Call Margin

Control of Larger Losses
Call margin acts as a protective mechanism that prevents the trader from losing more than the capital available in their account. This feature is especially crucial in volatile markets like Forex and cryptocurrencies, as it prevents large debts and irreparable damages.
Timely Awareness of Account Status
When a margin call is triggered, it serves as an alert to the trader that their account status has become critical. This warning provides an opportunity to review the trading strategy, reduce trade volumes, or inject more capital, helping to prevent further significant losses.
Protection of Broker and Trader’s Capital
The margin call system not only protects the trader from significant losses but also safeguards the broker's capital. This ensures that traders only operate within the available capital in their account, preventing the creation of unmanageable debts.

Disadvantages of Call Margin

Forced Closure of Trades
One of the biggest disadvantages of a margin call is that the broker may automatically close open positions without consulting the trader. This can sometimes result in missed opportunities for price reversals and recovery of losses.
Stress and Psychological Pressure
A margin call typically causes significant stress and psychological pressure for the trader. These negative emotions can lead to hasty decisions and more mistakes in subsequent trades.
Major Losses Due to Lack of Knowledge
Traders who are unfamiliar with margin concepts and risk management may not fully understand the extent of the risk. As a result, without proper capital management, the likelihood of a margin call and the loss of the entire capital increases.

Margin Call in Gold Trading

Gold trading requires more precise risk management due to its high volatility and the unique nature of this asset. The following article discusses the most important factors and points related to margin calls in gold trading:

Sensitivity to Economic and Political News

Gold prices are highly influenced by economic and political events. The release of economic data such as interest rates, inflation, or geopolitical crises can cause sudden increases or decreases in gold prices. These rapid fluctuations, if stop loss orders are not set or risk is not managed properly, can quickly deplete your capital and result in a margin call.

High Volatility in Short Timeframes

Gold is one of the assets that can experience significant fluctuations within short timeframes. While this feature creates profitable opportunities for professional traders, entering with large positions and without proper capital management may quickly bring your account to the brink of a margin call.

High Leverage and Increased Risk

Forex and CFD brokers usually offer high leverage in gold trading, which can amplify your profits. However, even the smallest negative fluctuation in gold prices can reduce your capital and trigger a margin call. To mitigate this risk, it is advisable to use reasonable leverage that aligns with your capital.

Entering Trades with Disproportionate Position Sizes

A common mistake in gold trading is entering trades with positions larger than the account can handle. Some traders assume that gold will always trend upward and invest large amounts without considering the risks. As a result, even small fluctuations can destroy their capital and lead to a margin call.

Failure to Set Stop Loss

The gold market can experience sudden price drops or increases within minutes. If a trader enters the market without setting a stop loss, these sharp fluctuations can significantly reduce the account balance and create margin call conditions. Setting an appropriate stop loss is one of the best ways to prevent this situation.

Failure to Track Key Economic Events

The gold market reacts strongly to important events, such as Federal Reserve decisions, U.S. interest rates, and economic crises. Traders who enter trades without reviewing the news may be caught off guard when these events occur and may eventually face a margin call.

Lack of a Defined Trading Plan

Gold trading without a clear trading strategy and prior planning can lead to emotional and irrational decisions. Traders who act based on emotions are usually more vulnerable to market fluctuations and are at a higher risk of a margin call.

Margin Call in Cryptocurrency

The most important factors and points related to margin calls in cryptocurrency trading:

Severe and Unpredictable Volatility

The cryptocurrency market experiences sudden and severe fluctuations due to its decentralized nature and strong influence from news events. These fluctuations can cause prices to drop drastically in just a few minutes. If a trader enters a trade without setting a stop loss or properly managing risk, these sudden changes can lead to a decrease in account balance and, ultimately, trigger a margin call.

Excessive Use of Leverage

In cryptocurrency trading, many exchanges offer high leverage, which can increase potential profitability. However, this tool is also very risky, as even a small movement against the trade can put your entire capital at risk. Trading with high leverage in the cryptocurrency market without proper planning is one of the most significant causes of margin calls.

Low Liquidity in Some Cryptocurrencies

In the cryptocurrency market, some low volume alt coins have very low liquidity. This makes it difficult to execute orders at favorable prices during extreme volatility. In such situations, the account balance may decrease faster than expected, triggering a margin call. Trading in highly liquid cryptocurrencies can reduce this risk.

Impact of Fundamentals and Sudden News

The cryptocurrency market is heavily influenced by global news, regulatory changes, and even tweets from influential figures. For example, news about legal restrictions in a country or a major exchange being hacked can cause prices to fall rapidly. In such cases, if a trader has entered the market with high capital and no stop loss, the likelihood of a margin call is very high.

Neglecting Stop Loss

Many traders, due to overconfidence in their analysis, avoid setting stop loss orders in their cryptocurrency trades. Given that the crypto market operates 24/7 without breaks, if unexpected fluctuations occur during the trader's sleep or rest hours, failing to set a stop loss can lead to a sudden decrease in account balance and trigger a margin call.

Delay in Providing Additional Margin

In some cryptocurrency exchanges, when the margin level decreases, a warning is sent to the trader to increase their balance. However, if the trader fails to deposit additional funds in time, their open positions will be automatically closed, and the account will experience a margin call.

Impact of Spikes in the Crypto Market

In the cryptocurrency market, sudden spikes in price can occur due to a rapid decrease in liquidity or the execution of large orders. These quick price movements, even if short term, can cause the margin level to drop drastically, triggering a margin call. Using stop loss orders and setting safe levels in trades can help mitigate this risk.

Margin Call in the Iranian Stock Market

Factors and conditions related to the occurrence of margin calls in the Iranian stock market:

Decrease in the Value of Collateralized Assets

In margin trading in the Iranian stock market, brokers typically provide traders with trading credit in exchange for collateral (such as stocks or cash). If the value of these collateralized assets decreases due to falling stock prices or a bearish market, the value of your assets may fall below the minimum required level. In such cases, the broker will ask you to deposit more funds or sell part of your assets.

Severe Price Drop in Futures Contracts

In the Iranian futures market, traders must pay a margin to open positions. If the price of the underlying asset (such as gold, saffron, or other products) falls against your prediction and your account balance drops below the minimum margin, the trader must increase their balance to prevent the positions from being closed. Otherwise, the broker will close the open positions, and this situation is similar to a margin call in global markets.

Neglecting Stop Loss in Leverage Trades

In the Iranian stock market, some traders engage in futures or margin trading without setting stop loss orders. As a result, if the price of a stock or underlying asset falls sharply, your entire account balance could decrease rapidly, and the broker will close your open positions to cover the losses. Setting stop loss orders in leverage trading can prevent this situation.

Failure to Provide Additional Funds on Time

When the value of your account in margin trading or futures contracts decreases, the broker usually gives you a specific deadline to increase your balance. If no action is taken within this timeframe, the broker has the right to sell your assets or close your open positions. This process is very similar to a margin call in other financial markets.

Severe Fluctuations in the Iranian Stock Market

The Iranian stock market sometimes experiences severe fluctuations, which, if you enter with a large position and fail to manage your capital properly, can lead to a rapid decrease in the value of your trading account. In these cases, if you are unable to increase your account balance on time, there is a risk of forced closure of open positions and losing your capital.

How to Avoid a Margin Call?

To avoid a margin call, the following measures are essential:

Start with Small Trade Sizes

New traders should start with small positions. This approach allows you to test your strategies in real market conditions while avoiding large risks. Gradually growing your capital and increasing trade sizes with experience is a safer and more logical approach.

Avoid Revenge Trading

After a large loss, some traders try to recover quickly by entering larger, riskier trades. This emotional behavior typically leads to more losses and eventually a margin call. In such cases, it is better to remain calm, review your strategy, and return to the market with a clear mind.

Diversify Your Capital and Trades

Putting all your capital into one asset or currency pair increases your risk. By diversifying your trades and entering multiple markets, you can reduce your overall risk. This method ensures that even if one of your trades incurs a loss, others may help offset it.

Practice Capital Management

Capital management is one of the primary principles of avoiding a margin call. It is better to risk only a small percentage of your capital in each trade and avoid entering trades with large volumes. Proper capital allocation allows you the opportunity to recover in case of a loss, preventing forced position closures.

Set Margin Alerts

Many brokers offer the option to set alerts for margin levels. By activating these alerts, you can be notified of critical account status before reaching the margin call stage, allowing you to take action by either providing more funds or closing high risk positions.

Set Stop Loss

Specifying a stop loss for each trade ensures that if the market moves against your prediction, your losses are capped at a reasonable level. Trading without a stop loss is like driving without a seatbelt; during sharp market fluctuations, it can lead to a sudden decrease in account balance and eventually a margin call.

Constantly Monitor the Market and Economic News

News and economic events can have a significant impact on financial markets. The release of important economic reports, central bank decisions, and political events can cause drastic price movements. By continuously monitoring these events and avoiding market entries during sensitive data releases, you can protect yourself from sudden, unexpected fluctuations.

Choose an Appropriate Trading Strategy

A precise and tested trading strategy can guide you on when to enter and exit the market. Successful strategies typically involve setting entry and exit points, stop loss, and take profit levels. Adhering to these strategies helps avoid emotional decision making and unexpected losses.

Practice in a Demo Account

Demo accounts provide a risk free environment to practice and test new strategies. Trading in a demo account helps you learn capital management and stop loss methods without risking real money, preparing you for actual trading.

Use Leverage Wisely

While leverage can increase your profitability, it also increases the risk of your trades. It is recommended to use lower leverage when the market is volatile or when you lack sufficient experience. High leverage, even with small fluctuations, can quickly bring your account to a margin call stage.

Use Trailing Stop

A trailing stop is a risk management tool that helps traders protect their profits and prevent large losses. The trailing stop works like a stop loss but automatically adjusts in the direction of a profitable market movement.
For example, if you have an open buy position and the asset price rises, the trailing stop increases proportionally, maintaining a set distance from the market price. If the market reverses suddenly, the trailing stop is triggered at a point higher than your initial entry, preventing significant profit losses or heavy drawdowns.

What Are the Steps After a Margin Call?

After a margin call, the following steps should be taken:

Accepting Reality and Staying Calm

The first step is to face the current situation with calmness and acceptance. A margin call can be a bitter and discouraging experience, but emotional reactions like hasty decision making or re-entering trades without reviewing previous mistakes only lead to more losses. Maintaining mental calmness helps you act more consciously in future trades.

Analyzing the Reasons for the Margin Call

After regaining calm, it is important to analyze the main reason for the margin call. Investigate whether the lack of a stop loss, the use of high leverage, excessive position sizes, or entering during volatile times caused this event. A detailed analysis of previous mistakes will help you avoid them in the future.

Reviewing and Revising the Trading Strategy

If your trading strategy led to significant losses, it needs to be reviewed. Check whether your entries and exits were based on logic and analysis or influenced by emotions. In this stage, you can adjust your strategy and include aspects like setting stop loss orders, reducing position sizes, and practicing capital management.

Learning from Past Mistakes

A margin call can be a valuable learning opportunity. Reviewing the details of past trades, analyzing market behavior during the loss, and identifying weaknesses in your decision making can provide valuable insights. Learning from mistakes is the most important step in preventing them from happening again in the future.

Improving Trading Knowledge and Skills

One of the main reasons for a margin call is a lack of knowledge and skill in technical analysis, fundamental analysis, or risk management. After a margin call, it is recommended to focus on your education. Participating in training courses, reading reliable resources, and gaining practical experience in demo accounts can help you perform better in the future.

Rebuilding the Trading Account

After reviewing and learning from past mistakes, if you decide to re-enter the market, start with a small capital and precise risk management. It is better to begin with small trade sizes and gradually increase your position sizes after gaining confidence and success in your trades.

Creating a Detailed Financial Plan

To avoid getting into critical situations again, it is advisable to create a detailed financial plan. Determine the amount of capital you are willing to risk and allocate your capital across different assets to reduce your risk.

Using a Demo Account

If you are not yet confident in implementing new strategies, practicing in a demo account is a good solution. This method allows you to test your strategies without the risk of losing real capital and identify their weaknesses.

Setting Realistic Goals in Trading

After a margin call, some traders try to recover their previous losses quickly by entering high risk trades. This typically leads to more losses. Instead, setting logical and realistic goals along with sticking to your trading strategy can help pave the way for your return to profitability.

Focusing on Trading Psychology

A margin call usually creates significant psychological pressure. For success in financial markets, strengthening emotional control skills and stress management is essential. Techniques such as meditation, mental exercises, and adhering to risk management principles can help you maintain your calm during challenging situations.

Difference Between Liquidation and Margin Call

Examining Liquidation and Margin Call:

General Definition

A margin call occurs when the balance of your account reaches a level where you can no longer maintain your open positions. In this case, the broker warns you that you need to deposit more funds or close your open positions.
Liquidation happens when the balance of your account drops to zero or near zero, and the broker automatically closes all your open positions to prevent you from going into debt.

Warning Stage

A margin call acts as an initial warning. At this stage, there is still an opportunity to recover losses or deposit additional funds. This warning gives the trader time to act, but liquidation usually happens without any prior warning. At this point, your account reaches a level where the broker's system automatically closes your positions, and there is no opportunity for recovery.

Required Margin Level

A margin call is typically triggered when the margin level of your account drops to the minimum required level set by the broker (usually 100% or higher). Liquidation occurs when your margin level becomes so low that you can no longer maintain your open positions (usually below 20% or zero).

Amount of Loss

A margin call does not necessarily mean the complete loss of capital. If you deposit more funds or close some of your positions at this stage, you can avoid liquidation. Liquidation usually means losing a significant portion or even the entire account balance, as the market reaches a point where the system automatically closes all your trades.

Control of the Trader

In a margin call situation, you still have control over your trades and can take appropriate actions, such as depositing funds or reducing the size of your positions, to prevent your positions from being closed. However, in liquidation, control is handed over to the broker or exchange, and you have no role in the process of closing the trades.

Type of Markets

Margin calls are more commonly seen in markets like Forex, stock markets, and futures trading, where margin trading is prevalent. In contrast, liquidation mainly occurs in cryptocurrency markets, especially in leveraged trading.

Capital Recovery

In a margin call situation, it is still possible to save your account, and you can make the right decisions to prevent further losses. However, in a liquidation scenario, your capital is usually lost entirely, and recovery is impossible unless the market reverses quickly and trades are closed at a favorable level.