Trading or buying digital currencies and selling in the financial markets, especially in the cryptocurrency market, requires knowledge of the types of markets and the concepts raised in them. One of the basic terms used in all financial markets is call margin. A margin call is a warning message indicating that a trader’s trading losses have reached a specified margin limit and the trader must do something to avoid liquidating or exiting the trade. For this purpose, we try to provide information about Call Margin in this article Also let’s examine methods of preventing call margin and the difference between call margin and liquidation.
What is call margin?
To answer this question, we can say that Margin Call is a message asking traders to add money to their trading account or to close some trading positions to have more profit. Margin is the trader’s main capital used to guarantee transactions. When leverage is used in trading, the trader enters the trade with their original capital. It is interesting to know that a call margin occurs when the amount of your losses on a cryptocurrency exchange exceeds a certain limit.
In other words, if you bought cryptocurrency and the price of the cryptocurrency has decreased and risen above that particular limit, a margin call occurs. Also, even if the digital currency’s price rises above a certain level, there will be a margin if there is a short position. Call margin is a risky situation for traders. Therefore, traders want to reduce the risk of requiring additional margins.
Ways to prevent a margin call
As we said, a call margin is a message that warns traders to add more money to their trading account or close some of their trading positions so that they don’t lose more than the limit. fixed and that they don’t lose their temper. Many traders try to avoid margin calls using methods. For this reason, in this part of the article, we try to examine ways to prevent call margin.
- One way to avoid margin calls is to not open a margin account and do margin trading whenever possible. This is because cryptocurrency trading involves a lot of price fluctuations and trading on margin or leverage increases risk.
- Another way to avoid margin calls is to set yourself a profit limit and stop the loss strategy and not try to cover the loss with a large trade.
- Always keep money in a savings account and use limits or leverage to do things with your savings so that if the price drops, it will soon be added to your savings account and you have a loan to trade in and meet a large limit.
- Another way to avoid a margin call is to borrow a small amount or make a margin transaction with lower leverage.
- Always deal with adequate knowledge and avoid emotional deals or sales.
What is the difference between a margin call and a liquidation?
Note that Margin Call is simply a warning given to traders or traders in the digital currency market or other supported markets to increase their existing balance to the extent of their account by adding new capital or closing their trading positions. Liquidations are a step further than margin calls, where trading losses are so high that digital currency exchanges simply close trading, and as a result, a large part of the user’s cryptocurrency is lost. Both liquidation and call margin are related to leveraged trading and have no meaning or application in spot trading.
Advantages and Disadvantages of Call Margin
Call Margin is sent as an alert message to traders in leveraged markets such as digital currencies, alerting them to important trading account conditions. This alert helps the trader to prevent his trading accounts from being liquidated by analyzing the market conditions and making appropriate decisions. For this reason, Call Margin is usually beneficial for sellers. The margin call is also negative. One of these disadvantages is the psychological pressure of receiving this message, which can affect the attitude of the marketers. Also, after receiving this warning, traders lose the opportunity to enter into a new transaction.
What is spot trading and how is it different from margin trading?
Spot trading is the most common type of trading. In this type of transaction, you buy and sell cryptocurrency directly for cash or other digital currencies such as Ethereum, Bitcoin, or stablecoins such as Tether and USDC at the current market price on a digital currency exchange. The reason for using the word real is that users buy and sell digital currency in this market. In this type of market, asset deliveries are made immediately, which is why it is also called a cash market. Margin trading, which allows users to open larger positions with less capital, takes place in the spot market but involves leverage and borrowing capital from the stock market.
The most important difference between spot and margin trading in the digital currency market has to do with the concept of the risk-reward ratio. Crypto markets are generally riskier than stocks, bonds, commodities, currencies, and other markets. The reason is simple:
You are borrowing money in margin trading, which can result in a bigger loss if the market moves against your expectations and predictions.
Margin trading is a useful tool for those who want to multiply trading profits. If this tool is used correctly The leverage used in margin trading accounts helps build profits and diversify investment portfolios. However, this trading method can increase your costs. However, you can ensure that settlement risks and margin calls are minimized by following some tips, such as using stop losses, risk management, non-trading, and more. Margin trading is riskier in more volatile cryptocurrency markets.