Margin call
What happens when a leveraged position loses value, and why must a trader add collateral or be closed out?
In plain words
A margin call is a demand from a broker or exchange for more collateral when a leveraged position has lost value. Leverage means trading with borrowed money on top of one's own deposit, called the margin. If losses shrink that margin below a set level, the holder must add funds or the position closes.
Why it matters
A margin call turns an unrealised loss into a forced exit at whatever price the market offers, often at the worst moment of a fall. It also means the position's survival depends on collateral sizing, not on whether the original view was right.
In a real week: ETH, week of 3 September 2018
In the week of 3 September 2018, ETH fell 33.74%, from an open of 295.51 to a close of 195.81, with its worst single day at -19.86% on 2018-09-05 and its low of 185.02 reached at 03:00 UTC on Sunday 2018-09-09. A leveraged long held through that week would have seen its collateral erode quickly. The largest 1-hour move, 6.46% in magnitude, occurred at 09:00 UTC on Sunday 2018-09-09, near the end of the week.
A common mistake
Assuming a margin call only follows a total collapse. Even a moderate fall can trigger one when the position was leveraged heavily and little collateral was posted.