Margin

In simple terms

Margin is like a security deposit you put down to borrow money for bigger trades. If your trade goes against you, the exchange can take that deposit to cover losses.

Definition

Collateral required to open and maintain leveraged positions.

In depth

Margin represents the minimum collateral a trader must deposit to open a leveraged position on an exchange. When a position is opened, the margin requirement is locked as security, and the exchange monitors the account's equity-to-margin ratio in real-time. If losses accumulate and the account equity falls below the maintenance margin threshold, the exchange triggers a liquidation mechanism that automatically closes positions to prevent the protocol from incurring bad debt. Different trading pairs and leverage levels carry different margin requirements based on volatility and market risk parameters.

How does Margin work?

Margin is collateral a trader posts in order to open and hold a leveraged position. On opening, the exchange reserves an initial margin amount and locks it against that position. From then on the position is marked to market: unrealized profit or loss is added to or subtracted from the collateral to produce account equity. That equity is compared against a maintenance requirement on every price update. If equity falls below the requirement, the trader must post more collateral or the position is liquidated. Closing the position releases whatever margin remains.

An example

A trader deposits $3,000 of stablecoin and opens a $10,000 notional position, using illustrative figures. At a 20% initial margin requirement, $2,000 is locked, leaving $1,000 as free margin. If the position then moves 5% against them, that is a $500 unrealized loss: equity falls to $2,500 and free margin to $500. They can add collateral or reduce the position to rebuild the buffer.

Figures are illustrative only.

What beginners get wrong

• Margin is collateral rather than borrowed spending money, and unrealized losses draw it down continuously, long before any position is actually closed.
• Posting volatile crypto as collateral means the collateral and the position can fall together, shrinking the buffer faster than expected.
• Free margin is often treated as spare cash when it is the only cushion standing between a position and liquidation.

Related terms

• Leverage
• Initial Margin
• Maintenance Margin
• Liquidation
• Cross Margin
• Capital

Part of

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