🌡️Managing Margin
Margin management is a fundamental aspect of successful perpetual futures trading. This documentation delves into the critical aspects of margin management, including the processes of adding and removing margin from positions, the significance of prudent margin management, and the concept of the liquidation price.
Margin in Perpetual Futures Trading
In the context of perpetual futures trading, margin is a fundamental concept that represents the collateral or security required by the exchange to open and maintain a trading position. It serves as a financial cushion to cover potential losses that may occur as a result of adverse price movements. When a trader enters a position, they are required to commit a certain amount of capital as margin, which is a fraction of the position's notional value. Margin ensures that traders have sufficient funds to fulfill their contractual obligations and prevent default on their positions.
Margin plays a dual role: it facilitates leveraged trading, allowing traders to control larger positions with relatively smaller amounts of capital, and it acts as a protective measure to minimize the risk of losses exceeding the available funds. Monitoring and managing margin levels are essential aspects of risk management in perpetual futures trading, as insufficient margin can lead to position liquidation.
Initial Margin Ratio
The initial margin ratio is a crucial metric in perpetual futures trading that determines the required margin as a percentage of the position's notional value. It is directly related to the level of leverage a trader can use. A higher initial margin ratio implies lower leverage, and conversely, a lower initial margin ratio allows for higher leverage.
For example, if the initial margin ratio is set at 10%, a trader with $10,000 can open a position with a notional value of up to $100,000 (10 times their capital) using 10x leverage. The initial margin acts as a safety net to cover potential losses and ensures that traders have sufficient collateral to enter leveraged positions.
Initial margin ratio is an inverse of leverage:
Initial Margin Ratio = 1 / Leverage
Maintenance Margin Ratio
The maintenance margin ratio is another critical parameter that determines the minimum margin level required to keep a position open without facing liquidation. When the position's margin falls below the maintenance margin ratio, it triggers the liquidation process. The maintenance margin ratio is directly linked to the liquidation price.
Suppose the maintenance margin ratio for a particular contract is 1%. If a trader opens a long position with $10,000 and the notional value is $200,000, the liquidation price would be reached when the position incurs losses equivalent to 99% of the initial margin. Understanding the maintenance margin ratio is vital, as it allows traders to calculate their liquidation price and manage their risk effectively. Maintaining a comfortable margin level above the maintenance margin ratio is essential to avoid unexpected liquidation events.
In conclusion, the initial margin ratio dictates the leverage available to traders, impacting the size of their positions relative to their capital. The maintenance margin ratio determines the minimum margin level required to prevent liquidation and plays a pivotal role in calculating the liquidation price. Both ratios are critical components of margin management and risk control in perpetual futures trading.
Market Type | Maximum Leverage | Minimum Leverage | Maintenance Margin |
Crypto USDT margin | x50 (2%) | x1 (100%) | 1% |
Crypto TON margin | x50 (2%) | x2 (50%) | 1% |
Commodity | x100 (1%) | x2 (50%) | 0.5% |
Forex | x100 (1%) | x10 (10%) | 0.3% |
Liquidation Price
Liquidation price is a key element of margin management for traders, signifying the price level at which their position will be forcibly closed by the exchange due to insufficient collateral to cover potential losses. Important aspects for effective risk management include:
At the time of position liquidation, only the collateral for the current position is at risk. Funds in your account will not be affected.
To push back the liquidation price, traders can use the 'Add Margin' feature, thereby increasing their collateral.
An effective tool is the placement of a stop-loss order, which allows the position to be automatically closed at a specified price, thus preventing potential liquidation.
The liquidation price changes over time. It can move away from the initial opening price if financing (Funding) is being accrued on your position, or move closer to the opening price if the financing is negative. The accumulated value is available in the 'Realized P&L -> Funding' section on the position card."
Example: Computing Liquidation Price
Suppose a trader opens a long position in a perpetual futures contract for Bitcoin (BTC) with the following details:
Entry Price: 50 000 $
Leverage: 20x
Initial Margin Rate: 5%
Maintenance Margin Rate: 1%
The trader's liquidation price for a long position (LP) can be calculated as follows:
In this example, with an initial margin rate of 5%, a maintenance margin rate of 1%, and a leverage of 20x, the liquidation price for the long position is $48,000.
Now, let's consider a short position in the same Bitcoin perpetual futures contract with the following details:
Entry Price: 50,000 $
Leverage: 20x
Initial Margin Rate: 5%
Maintenance Margin Rate: 1%
For a short position, the trader's liquidation price (LP) can be calculated as follows:
In this example, with an initial margin rate of 5%, a maintenance margin rate of 1%, and a leverage of 20x, the liquidation price for the short position is $52,000.
The examples given for calculating liquidation prices in perpetual futures trading are purely illustrative and do not consider the effects of trading fees. In real trading situations, both rollover and funding fees can affect the performance and results of positions. Additionally, when trading pairs with collateral in TON, changes in the TON price impacting the liquidation price are not included. Traders should always refer to the liquidation price shown in the Storm user interface for precise information.
Managing Margin
To fine-tune your position margin, scroll down on your position screen and select the appropriate option: Add or Remove:
When adjusting the amount of collateral (Мargin), please pay attention to the following rules:
There is a correlation between the amount of collateral and the liquidation price. The less collateral remaining, the closer the position's liquidation price becomes. When changing the collateral for a position, it is necessary to consider the maximum and minimum permissible leverage for the given type of trading pair, which cannot be exceeded as a result of changing the amount of collateral.
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