How Do Margin Calls Act as a Psychological Trigger in Derivatives Markets?

Margin calls are a direct psychological shock, signaling that a trade is losing money and capital is at risk. This immediate financial pressure induces fear and forces traders to liquidate positions to meet the call.

The forced selling is often done at unfavorable prices, confirming the trader's negative bias. This panic-driven liquidation adds supply to the market, further driving down prices and triggering more calls.