In digital currency trading, leverage and margin are closely related. Leverage refers to the behavior of traders using borrowed funds to trade in order to amplify investment returns. Margin refers to a certain amount of digital currency or funds held by the trader in the exchange to ensure the safety and stability of the trader's trades.
In trading, the larger the leverage, the less margin is used, but at the same time, the liquidation price of the position is closer to the opening price, the loss potential of the position is smaller, and it is easy to be liquidated; the smaller the leverage, the more margin is used, and the liquidation price of the position is further away from the opening price, the loss potential of the position is larger, and it is less likely to be liquidated.
Isolated Margin
The isolated margin model refers to the independent separation of the position margin and the trader's account balance. Under this model, traders can freely decide on the leverage ratio used. If the position margin falls below the maintenance margin level, the position will be liquidated, and the maximum loss that the trader needs to bear is the position margin. In the isolated margin mode, you can add and reduce the margin for this position.
For example, a trader opened a position of 1,500 BTC/USDT at a price of $10,000 with a leverage of 1x. The initial margin for opening the position is 0.15 BTC. Later, he increased the leverage to 3x, and the required initial margin was also adjusted from 0.15 BTC to only 0.05 BTC. In the event of liquidation, he will only lose the initial margin of 0.05 BTC (excluding Handling fees). This enables traders to effectively control risks.
The advantage of the isolated margin model is that traders can better control the risk of their positions and can conduct leveraged trading to increase returns. However, it also has risks, such as losing more assets when forced to liquidate a position.
Cross Margin
The cross margin model refers to all positions sharing the margin in the contract account, that is, using all available balances in the corresponding currency as the position margin to maintain the position and avoid liquidation. If a liquidation event occurs, the trader may face a complete loss of their margin and position. If a trader sets a high leverage ratio under the cross margin model, they need to maintain enough available balances to meet the maintenance margin requirement to avoid liquidation due to insufficient asset value.
The initial margin refers to the margin amount that the trader needs to pay when opening a position, and the maintenance margin refers to the minimum margin amount required to maintain the position. In the cross margin model, the maintenance margin is calculated based on the current price of the contract and the leverage ratio. If the asset value falls below the maintenance margin requirement, liquidation will be triggered. Traders can use the calculator function to view the current maintenance margin requirements for their positions.
Example
Assuming that the current BTC price is $20,000, user A has 20,000 USDT in their contract account and uses 10x leverage for BTC/USDT perpetual contract trading.
If user A chooses the isolated margin mode to buy 1 BTC long, he only needs to provide 10% of the price of 1 BTC as initial margin, which is 2,000 USDT, to obtain a buying power of 20,000 USDT after 10x leverage.
If the BTC price rises to $22,000, user A's transaction will gain a 100% profit, that is, a profit of 2,000 USDT.
If the bitcoin price falls to $19,000, user A's transaction will lose 100%, that is, a loss of 2,000 USDT. His entire margin of 2,000 USDT will be liquidated.
If user A chooses the cross margin mode, he can open up to 10 BTC long using 10x leverage for BTC/USDT perpetual contract trading. If he chooses to open 1 BTC long, all 20,000 USDT in his contract account will be used as initial margin.
If the BTC price rises to $22,000, user A's transaction will gain a 100% profit, that is, a profit of 2,000 USDT.
If the bitcoin price falls to $19,000, user A's transaction will lose 100%, that is, a loss of 2,000 USDT. At this time, user A's transaction still has some protection because there are remaining funds in his margin account.
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