The biggest killer in trading markets: How liquidation can wipe out your principal in one go? Essential risk safeguards for beginners

What is a margin call? Why do traders lose everything?

Margin call is the most terrifying outcome in leveraged trading—when your trading position moves against you, losses continue to grow, and your account equity falls below the minimum margin threshold set by the broker, the system will automatically force close all your positions, leaving no chance for a comeback.

Simply put: you lose all your margin, and may even owe debts.

Why does a margin call happen? There are only two core reasons:

• Incorrect judgment of trading direction, contrary to market trend
• Losses exceeding available margin, with the maintenance rate falling below the platform’s minimum standard

High leverage is the number one culprit of margin calls

Leverage is like a double-edged sword—it can amplify profits but also magnify losses. Many investors pay a heavy price for underestimating leverage’s power.

Example: Suppose you use NT$100,000 of capital to trade a Taiwan index futures contract, with 10x leverage, controlling NT$1,000,000 worth of positions. At this point:

• A 1% adverse move in the market results in a 10% loss of your principal
• A 10% adverse move could wipe out your margin entirely and trigger a margin call

Many beginners believe they can control risks, but market changes often come faster and more violently. High leverage may seem to offer quick profits, but it hides endless traps.

Five common trading pitfalls that easily trigger margin calls

1. Holding onto losing positions, refusing to cut losses

This is the most common fatal mistake among retail traders. Holding onto the hope “it will rebound soon,” only to face gap-down drops, forcing market orders to close positions at unfavorable prices, resulting in losses far beyond expectations. The market won’t change its trend just because of your hopes.

2. Hidden costs not fully accounted for

Common pitfalls:

• Overnight positions not closed, becoming overnight holdings, requiring additional margin the next day, and risking a gap-down open leading to a margin call
• Selling options during volatility spikes (e.g., election periods), where margin requirements can double instantly

3. Liquidity traps

In less traded assets or during after-hours trading, bid-ask spreads can be outrageously wide. You set a stop-loss at NT$100, but the market only has buyers at NT$90, forcing you to exit at a poor price.

4. Black swan events

Major events like the COVID-19 pandemic or Russia-Ukraine war can cause continuous limit-downs. At such times, brokers may be unable to help you close positions, and if your margin is wiped out and you still owe money, you face liquidation risk.

5. Improper position adding

Many investors blindly add to losing positions, trying to lower their average cost to turn losses into gains. But if their judgment continues to be wrong, adding margin only accelerates a margin call. Position adding should be based on confidence in the market, not panic.

Risk levels of margin calls across different assets

Cryptocurrency — High risk zone

The crypto market has the largest volatility and the highest frequency of margin calls. There have been cases where Bitcoin fluctuated 15% within a single day, causing most investors to face collective margin calls. The most frightening part is that during crypto margin calls, not only does your margin disappear, but your purchased coins are also liquidated.

Forex margin trading — Leverage game

The core of forex trading is controlling large sums with small capital. Taiwanese investors like to use high leverage, but they need to understand these basics:

Contract specifications come in three types:

• Standard lot: 1 lot
• Mini lot: 0.1 lot
• Micro lot: 0.01 lot (best for beginners)

Margin calculation formula: Margin = (Contract size × Number of lots) ÷ Leverage

Example: Using 20x leverage to trade 0.1 lot of a currency pair (worth US$10,000) → Required margin = 10,000 ÷ 20 = US$500

When your account margin ratio drops to the platform’s minimum standard (usually 30%), the system will forcibly close your position. For example, if your account has US$500 but loses US$450, leaving only US$50, the system will immediately liquidate.

Stock leverage — Varies by situation

Trading stocks with cash only: no margin call Buying stocks with 100% of your own funds is safest; even if the stock drops to zero, you only lose your principal, no debt incurred.

Margin financing and day trading: can trigger margin calls

• Margin buying stocks (borrowing from broker): If the maintenance rate drops below 130%, you receive a “margin call,” and if you don’t top up, positions are forcibly closed. For example, using NT$600,000 of margin to buy NT$1,000,000 worth of stocks, a 20% drop in stock price triggers a margin call.
• Failing day trades (not closing positions, leaving overnight): If the stock gaps down and hits the limit-down, you can’t sell, and the broker will liquidate your position. If margin is insufficient, a margin call occurs.

Advice for beginners by risk level

The safest route

1. Start with cash stocks: buy stocks with spare cash, risking only your principal
2. Avoid leveraged products: futures, contracts, etc., better left to experienced traders
3. Use dollar-cost averaging rather than all-in: much lower risk

If insisting on trading derivatives

1. Start with micro lots: trade 0.01 lot to familiarize yourself with the market
2. Be conservative with leverage: recommend below 10x for beginners
3. Always set stop-loss orders: never fight the market blindly

Risk management tools — lifesavers in trading

The importance of stop-loss and take-profit

Stop-loss (SL): Set an automatic sell price to prevent losses from expanding when the price hits your preset level.

Take-profit (TP): Set an automatic sell price to lock in profits when the price reaches your target.

Both are crucial tools to help you precisely control risk and avoid losing everything in one trade.

( Risk-reward ratio calculation

Risk-reward ratio = ()Entry price - Stop-loss price() ÷ ()Take-profit price - Entry price###)

A lower ratio indicates a more favorable trade. For example, risking NT$1 to make NT$3 yields a 3:1 reward-to-risk ratio, which is a worthwhile trade.

( How to determine stop-loss and take-profit levels?

Experienced traders often use support and resistance lines, moving averages, and other technical indicators. Beginners can use the simple percentage method: set 5% above and below the entry price as stop-loss and take-profit points. This way, you don’t need to watch the screen all day, and the rules are clear and straightforward.

Negative balance protection — the last line of defense

In regulated exchanges, negative balance protection is a legal requirement—you will only lose what’s in your account, and won’t owe broker debts.

Simply put: zeroing out your account is the limit; any excess is absorbed by the broker. Some brokers proactively reduce leverage before major market moves to avoid huge losses.

This safety mechanism mainly protects beginners, giving traders room to make mistakes. But remember—this is not a free pass to risk unlimited losses; it’s the last safety net.

Final checklist before trading

✓ Confirm you truly understand the risks of the target product
✓ Calculate accurate margin requirements and maintenance rates
✓ Set reasonable stop-loss and take-profit levels
✓ Prepare emergency margin funds in case of short-term market volatility
✓ Practice with small positions to gradually build experience
✓ Choose regulated, reputable platforms for trading

Investing always involves gains and losses, and leveraged trading is a high-risk game. Before entering, make sure to thoroughly learn trading knowledge, utilize risk management tools, and set clear stop-loss and take-profit ranges to survive longer and go further in the market.