If you are new to trading, you may have come across the terms "margin call" and "liquidation" and wondered what they mean. In this article, we will explain the difference between these two terms and why they are important for traders to understand.

A margin call is a warning that your account is underfunded. This means that the amount of money you have in your account is not enough to cover the losses you have incurred on your trades. In other words, your account balance has fallen below the required margin level.

When you open a trading account, you are required to deposit a certain amount of money as collateral, known as margin. This margin acts as a safety net for the broker in case your trades go against you. The margin level is usually expressed as a percentage, and it varies depending on the broker and the type of assets you are trading.

When the margin level falls below a certain threshold, the broker will issue a margin call. This is a warning that you need to deposit more funds into your account to bring the margin level back up to the required level. If you fail to do so, your broker may take action to protect themselves from potential losses.

Liquidation occurs when your position is forcibly closed because the margin call was not met. In other words, if you do not deposit more funds into your account after receiving a margin call, your broker may close your trades to prevent further losses.

It is important to note that liquidation is not the same as a margin call. A margin call is a warning, while liquidation is the actual closing of your trades. Liquidation can happen quickly, and you may not have enough time to deposit more funds into your account to prevent it.

Only users running derivatives strategies should care about the risk of liquidation. Derivatives are financial instruments that derive their value from an underlying asset, such as stocks, currencies, or commodities. These instruments are highly leveraged, meaning that you can control a large amount of the underlying asset with a relatively small amount of money.

While leverage can amplify your profits, it can also increase your losses. This is why traders who use derivatives strategies should be aware of the risk of liquidation. If the market moves against their position, they may receive a margin call and face the possibility of liquidation if they do not act quickly.

In summary, a margin call is a warning that your account is underfunded, while liquidation is the actual closing of your trades. Only traders using derivatives strategies should be concerned about the risk of liquidation. It is important to monitor your margin level and act quickly if you receive a margin call to avoid the possibility of liquidation.