How to Avoid Margin Calls in Cryptocurrency Trading?

Margin trading allows traders to make significant profits with limited capital if the price moves in a favorable direction. But the price doesn’t always act like this, so the trader may face margin calls or potential liquidation if the trader doesn’t know how to deal with margin calls. 

Here are a few tips that may help you avoid margin calls or reduce the possibility of liquidation.

1. Understand margin call and margin call levels

Understanding what you’re doing and what you may face is the first and crucial step to avoid potential margin calls and liquidation.

Some traders pay more attention to technical analysis, entry/exit points, and potential price movement but do not focus so much on equity, free and used margin, or margin levels. 

If a margin call was a surprise for you when trading crypto, then most likely you don’t know what it caused. This may indicate that you opened positions without taking into account your current equity and position status. Margin calls appear when margin level drops below a certain level, alerting traders that you need to do something to meet margin requirements or just accept the risks. 

In most cases, margin calls are automated and brokers send them via email or other preferable communication channels for traders. 

2. Don’t forget about your pending orders

A lot of traders don’t think about potential margin calls and margin requirements when they place pending orders. Usually, traders place a pending order and keep it open until the price reaches a specified level or the order expires.

Margin is not applied to pending orders because they are not filled yet. So if you don’t monitor your pending orders and their margin requirements, they may be filled in not so appropriate time and cause a margin call. 

In this case, try to take into account potential margin requirements when placing pending orders, and keep some free margin to cover these positions. 

3. Use protection orders

You can use stop loss to prevent your position from taking further losses and getting a margin call. Stop Loss can be placed before opening position or when your position is already open. 

If you trade without a Stop Loss and your position keeps going in the negative zone, then it may cause a margin call, depending on how much free margin you have on your account to cover potential losses.

4. Don’t go all-in with one trade

Some traders like to open one huge position on which the entire trader’s balance may depend. Such overconfident trading increases the probability of getting a margin call or even liquidation.

To avoid such situations, you can use an approach called “scaling”. Instead of opening one position worth 20 lots, you can start with 5 lots and then scale the position with another 5 lots if the price moves in your direction. In this case, you may predominantly set up the amount and at which level you scale your position.

Position scaling may also be useful if you trade on several markets and are not sure what to focus on. Also, you can use different stop losses and take profits for each scale, depending on your strategy and risk management. 

For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.

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