Margin Call — How to Prevent Further Loss in Futures Trading
Sweet cream, crunchy crust, topped with fresh and tart popping fruit! Who does not love pies? As a phenomenal baker, you baked a basic pie — called “initial margin”. Now you want to make a more delicious and awesome pie based on this basic pie, with fantastic toppings and cream — profit. The profit topping will make your pie more delectable. However, just as the world does not go according to your will, instead of adding delicious toppings and creams, the hungry monster — loss — may come unexpectedly and eat all of your pies! That monster is not even satisfied with eating your current pie. It even has plans to eat away all your pies that you make in the future. Is there any way to prevent further loss from the monster?
The basic pie — initial margin — in the futures market is one of the most important parts. The profit and loss arising from your “position” and market price fluctuations are reflected in the initial margin. In other words, if you have accurately predicted the market trend, your basic pie will have a nice topping and soft cream. On the other hand, if your prediction is wrong, the hungry monster will come to you and eat up your pie.
Today, let’s talk about how to deal with this hungry and ferocious monster. This monster eats up your pie as much as you lose in the market price fluctuations. We can not prevent this monster from eating the pie, but we can prevent the monster from eating all of the pies. Even more, we might prevent it from eating more than one pie.
Liquidation PriceLet’s take a piece of pie at a certain rate (1% here) and call it “maintenance margin”. Maintenance margin is the minimum amount of margin — the LAST piece of pie — you need to keep an order. If the monster has eaten your pie but has not touched this last piece yet, you still have the chance to recover the pie depending on market trends. But if you lose this last piece, you will lose your entire pie.
Then when do you know this danger signal? Most exchanges will present the liquidation price in advance when you order a contract. Liquidation price is the price at which the amount of remaining initial margin reaches the maintenance margin due to loss. In other words, if the market price falls below the liquidation price (for long positions) or climbs up (for short positions) you will lose all of your pies.
Margin CallThe situation in which you lose all the pies you baked is called margin call. Margin call originated from a call from the traditional exchange to an investor who had not kept their maintenance margin. This investor who receives a margin call must add an initial margin to maintain his contract. However, this way does not prevent the possibility of further loss, so investors may lose more than the investment amount. Also, if such an investor does not fulfill the contract, the exchanges also suffer loss.
To prevent this situation, exchanges changed the margin call into a pre-processing system, not a post-processing. Now, the margin call clears the contract immediately when the investor’s losses reach the maintenance margin, thereby preventing further loss. Margin calls is sad news in that it loses all your initial margins, but it is good news in that it prevents further loss over initial margin.
How to Prevent Margin Call from Occurring
Even if margin call prevents further loss, it is not enough for us. What we ultimately want is to protect our pies from the monster. The appearance of the monster does not follow our will, but the domain of keeping the maintenance margin can be controlled. If we can keep only one piece of pie — maintenance margin, we have a chance to regain ourselves! There are several ways to prevent margin call from occurring.
First, always check the liquidation price when you order a contract. You can see your risk level by checking the liquidation price. If you know the margin call risk level in advance, you will be able to take other actions before you get a margin call.
Second, apply low “leverage” when you order. The higher the leverage, the smaller the initial margin. As the size of the pie is reduced, monster can eat up relatively quickly, making it easier to reach the maintenance margin. High leverage can bring you high profits, but it can also put you at high risk. If you are a safety-oriented person, invest in low leverage.
Third, add initial margin if you have an open order that has already been filled. Adding initial margin increases the size of the pie, making it harder to reach the maintenance margin. This is a way of looking for another chance to regain after escaping from danger of the margin call.
Finally, cut your losses. It is better to lose the least than to lose everything. Boldly cut the part of the pie with a knife, give it to the monster and grab the rest. The rest could be another investment that gives you the opportunity to bake other pies.
If you know the risks of adventure in advance, you will no longer be afraid. Start trading Bitcoin futures with up to 50x leverage on Nexybit here!Signature Campaignwww.nexybit.com | Nexybit : 50x Leverage 100% Referrals
