Recently, I’ve seen many beginners suffer losses during trading. In fact, many times it’s because they don’t understand what a margin call is. I’ve also experienced a few close calls, so I want to share these experiences with everyone.

Simply put, a margin call is when you lose so much that you can’t even cover the margin, and the trading system automatically liquidates all your positions. It sounds scary, but if you understand the principles, it can be avoided.

I found that the most common causes of margin calls are actually just a few. First is using too much leverage — this is the most destructive. I’ve seen someone open a futures position with 100k dollars of capital and 10x leverage, which is equivalent to trading a 1 million dollar position. As long as the market moves just 1% against you, your principal is lost by 10%. If it swings 10% in the opposite direction, the margin is instantly wiped out, and you get a margin call. At this point, there’s no chance to recover.

Another cause is the stubborn “wait-and-see” mentality, thinking “it will bounce back soon,” and not cutting losses. But then a gap-down crash occurs, and the broker liquidates at market price, resulting in losses far beyond expectations. Market changes often happen much faster than we imagine.

Also, be especially aware of hidden costs. For example, if you day trade but forget to close your position, you might be charged additional margin requirements for holding overnight, and a gap the next day can cause an instant margin call. Or if you’re selling options, a surge in volatility can suddenly double the margin requirement. Liquidity traps are another issue — trading obscure assets or during after-hours can have huge bid-ask spreads, so you might set a stop-loss at 100 dollars, but the market only offers 90 dollars for a quick sale.

The margin call risk varies greatly across different assets. Cryptocurrencies, due to their high volatility, are considered high-risk. Bitcoin once experienced a 15% swing that caused most investors to be margin called. When crypto gets margin called, not only is the margin wiped out, but the coins you bought can also disappear.

Forex margin trading is a game of using small amounts of money to control large positions. The margin requirement formula is: Margin = Contract size × Lot size ÷ Leverage. For example, with 20x leverage, trading 0.1 lot of a currency pair worth $10k requires $500 in margin. When your account’s margin ratio drops below the platform’s minimum (usually 30%), the broker will forcibly close your position.

Stock trading is a bit different. Trading with 100% of your own funds means that even if the stock price drops to zero, you only lose your principal and won’t owe money to the broker. But if you buy on margin, a maintenance ratio below 130% will trigger a margin call, and if you don’t add funds, your position will be liquidated. Failed day trades that leave positions overnight can also cause margin calls — if the stock gaps down and hits the limit down, you might not be able to sell, and the broker will liquidate your position.

To prevent margin calls, risk management tools are crucial. Stop-loss orders automatically sell your position when the price hits a certain level, helping you limit losses. Take-profit orders automatically lock in gains when the target price is reached. These two features help you control risk and avoid losing everything in one go.

Beginners can use simple percentage methods, like setting a 5% stop-loss and take-profit from the entry price, so you don’t have to watch the screen all day. The risk-reward ratio is also very important — basically, it’s more worthwhile if your potential gains outweigh your potential losses.

Regulated exchanges usually offer negative balance protection, meaning you can only lose the money in your account and won’t owe a huge debt. This is a safety net for beginners, giving some room for mistakes.

My advice is, if you’re still learning, start with stocks using cash only — at least you won’t get liquidated. Avoid futures and leveraged products until you gain more experience. Dollar-cost averaging is 100 times safer than going all-in.

If you really want to trade derivatives, start with micro lots, and don’t use too high leverage — under 10x is safer for beginners. Most importantly, always set a stop-loss and never fight the market. Margin calls sound scary, but with proper risk management, they can be avoided.