What is margin?

First, you need to understand what contract trading is. Contract trading essentially means that you have signed a contract with the exchange, stating that you only have $100 and want to open a $1000 long position on Ethereum. The exchange takes your $100 as a deposit and helps you open a $1000 position with 10x leverage. This is why your contract position has a nominal value. At this point, your $100 is the margin. What happens if the margin is insufficient? Then you will be liquidated, and the contract will end.

What is actual leverage?

There is a difference between actual leverage in cross margin and isolated margin. Let's take cross margin as an example:

Assuming you have $1000 in your contract account, and you used $100 with 10x leverage to open a $1000 position.

Then your actual leverage is 1.

What about isolated positions?

Assuming you have $1000 in your contract account, and you used $100 with 10x leverage to open a $1000 position.

Without adding margin to the isolated position, your actual leverage is still 5.

So be extra careful, you can't treat nominal leverage as actual leverage every day!

What is maintenance margin?

Maintenance margin is the minimum fund level that your account must maintain while holding a leveraged position. Once your account net value (equity) falls below this standard, the system will consider the risk too high and immediately trigger forced liquidation.

It is the minimum amount or percentage that the trading platform (or brokerage) requires investors to maintain in their account equity after opening a position. This percentage is usually lower than the initial margin required when you open a position.

Its main purpose is to protect the trading platform from incurring losses.

When the market moves unfavorably for you, your account equity will decrease. If the platform does not set a bottom line, and waits until your account equity drops to 0 or negative before closing, then any loss exceeding 0 needs to be borne by the platform. Maintenance margin acts as the platform's 'airbag', ensuring that there is still a small balance in the account during forced liquidation to cover the costs of liquidation and to deal with slippage caused by rapid fluctuations.

  • Initial margin is the 'ticket price'; you must pay enough to enter the market (open a position).

  • Maintenance margin is the 'warning line'; once this line is breached, you will be forced out (liquidated).

Rabbit legs jump jump jump jump rabbit legs jump jump rabbit rabbit picture picture picture - remind yourself to remember to post pictures

What are margin rate and margin ratio?

Margin Rate

"Margin Rate" is usually a broad concept that refers to the percentage of margin relative to the total value of the position. It can typically refer to one of the following two ratios:

Initial Margin Rate

This is the ratio of the minimum margin required to open a position to the nominal value of the position.

  • Calculation formula: Initial Margin Rate = Initial Margin / Nominal Value of Position

Relationship with leverage:

  • The initial margin rate is the reciprocal of the leverage multiple you choose.

  • For example, if you use 10x leverage, then the initial margin rate is 1/10 = 10%.

  • If you use 20x leverage, then the initial margin rate is 1/20 = 5%.

Function: It determines your maximum leverage, which is the 'threshold' for trading.

Maintenance Margin Rate

This is the ratio of the minimum margin that must be maintained in your account during the holding period to the nominal value of the position.

  • Calculation formula: Maintenance Margin Rate = Maintenance Margin / Nominal Value of Position

Function: It determines your liquidation price. Once your account net value (equity) falls below the maintenance margin amount calculated at this ratio, forced liquidation will be triggered. The maintenance margin rate is usually lower than the initial margin rate.

Margin Ratio

"Margin Ratio" or more precisely, **"Risk Margin Ratio" (different platforms may call it "Margin Level" or "Margin Rate", but the meaning is consistent) is a dynamic, real-time changing indicator used to measure the risk level of your account**.

This ratio compares your available funds with the minimum funds required to maintain the position, indicating how close you are to liquidation.

Calculation formula

The platform usually uses the following formula to calculate an indicator as your current account risk ratio:

Margin Ratio = Account Equity / Maintenance Margin

You might ask what account equity is: Account equity is the total amount of funds that you actually have left in your account if you close all positions at the current moment.

Or use another common formula (e.g., Binance's):

Margin Ratio = (Account Equity - Maintenance Margin) / Maintenance Margin * 100%

Note: Different platforms may have slight variations in calculation and naming, but the core functionality is the same.

Why did I get liquidated before reaching the liquidation price?

Having learned this far, you should know that liquidation is triggered based on the marked price, using the latest price for liquidation!

Additionally, be mindful that a fan was liquidated because a small amount of funds were deducted, leading to insufficient margin in an isolated position, resulting in liquidation!

So don't ask why you were liquidated before reaching the liquidation price; in fact, the price has already reached, you just saw the data at the time of liquidation.

Why is there still money left in the account after a full liquidation?

Having learned about the maintenance margin, you should be able to understand the basic logic now!

There are also other factors like insurance fund intervention and premium or discount during forced liquidation.

What is liquidation fee?

Liquidation fee is the extra trading fee charged by the platform to users who are forcibly liquidated. Since liquidation is taken over by the platform's risk control system and completed immediately at market price, this fee is used to compensate for the costs and risks incurred by the platform during this process.

So even if you don't want to stop loss, you should have one in front of the liquidation line, otherwise, if you get forcibly liquidated, you'll have to spend extra money!!!

Next, let's write down some key knowledge about contracts!

Let's talk about some key points that everyone frequently uses!