Trading 101: What is Margin Trading?
1. What is margin trading?
The margining system is one of the major innovations of the derivatives industry. Exchanges rely on their margining system to guarantee that both sides of derivatives contracts will fulfil their obligations.
How does it work then? Margin requirements between exchanges can be slightly different. After having deposited a small fraction of their equity into the margin accounts, traders are given the opportunity to borrow equity from a third party (mostly from exchanges) and significantly increase their buying power. Margin therefore has close ties with leverage trading. For more details on this, please refer to the Bitget Guide on Leverage and Risk Management of Coin-Ⓜ Futures.
Margin trading encourages traders to reevaluate their positions on a daily basis: traders whose account balance falls below a required amount will have to pay up for their uncovered exposure as fast as possible, or else the exchange can close out any open positions until the account balance meets the minimum value. Traders can also voluntarily exit some less favourable positions instead of depositing more equity into their accounts.
2. Different types of margin
There are three most important types of margin as follows:
Traders will encounter this term before all else. Initial margin refers to the minimum collateral (equity) required to open any new position. On traditional derivatives exchanges, initial margin is usually set at 10% or lower than the contracts’ notional value. The figure on different crypto derivatives exchanges can vary more considerably due to the fact that initial margin requirements have to strictly follow drastic changes in cryptocurrencies’ daily price movements. Just think of the initial margin as a down payment on a loan; exchanges need it to ensure the safety of principals.
Being an active participant in the markets, traders are exposed to daily price changes. Their (margin) account balance will fluctuate accordingly. Normally, derivatives are marked to market at the end of each trading day, allowing for the aggregation of daily profits and losses.
When losses reach a certain level, account balance will be brought down to below maintenance margin (the minimum amount of equity to be maintained in the account) and traders will be notified by exchanges to deposit more collateral to their accounts and raise their equity to initial margin.
Such a situation is universally known as a margin call. As mentioned above, traders have to meet the initial margin requirements in a particular time period to maintain their open positions, otherwise traders will be forced into liquidation, i.e. closing out open positions, until their current account balance satisfies the initial margin requirements for the remaining positions.
Please note that maintenance margin is always lower than initial margin.
Variation margin is the difference between the initial margin and the current (margin) balance and is to be calculated in case of a margin call. The varying nature of this type of margin stems from the fact that it must be determined on a position-to-position basis.
At Bitget, we introduce two other definitions of margin for the sake of easy understanding and efficient risk management.
The total amount of equity available for placing new trades everyday is called available margin.
Bitget always advises our customers to trade responsibly and effectively with the help of risk management tools. To promote the practice, whenever a trader opens two opposing positions of the same underlying and the same settlement currency, we will only require margin for the position of higher value.
Let’s take an example: John wants to long 5 BTC on Bitget because the conditions are favourable. However, due to high volatility he also tries to offset this long position by taking a short position of 2 BTC and consequently reducing his obligations of delivering all 5 BTC in case prices drop. When he uses Bitget Coin-Ⓜ Futures or Bitget USDT-Ⓜ Futures (note that both positions must be of the same settlement currency, for instance USDT or BTC), his margin account will be charged for the long position only.
This is the special design of Bitget margining system that allows for an easier risk assessment and better utilisation of funds.
Risk margin determines another class of margin requirements via the risk measure of each trader’s account. In the example right above we know that John’s obligations will be reduced through the application of hedging practices. The actual delivery obligations represent the maximum level of risk margin, but it will be updated in real-time as spot prices and contract values change. We are proud to say that Bitget is one of the only crypto derivatives exchanges that utilises this sophisticated mechanism to better resist the risk of liquidation.
3. Cross Margin vs. Isolated Margin
There are two main approaches to applying margin on exchanges: Cross Margin and Isolated Margin. Isolated Margin is easier for beginners to handle, while Cross Margin is more suitable for long-term strategies. As a leading derivatives exchange in the crypto space, Bitget makes both these options available for all users. Moreover, users can conveniently change their margin mode at any time to utilise their trading capital and avoid forced liquidations in extreme times.
In the Isolated Margin mode, each position will be allotted a specific margin and correspondingly an independent Isolated Margin account. The initial margin for Isolated Margin accounts is completely separated from each other and from available margin. This option encourages traders to proactively manage their individual positions and is designed for highly speculative trading, as the maximum loss possible is restricted to the Isolated Margin balance only.
Traders have to carefully manage these positions, as the balance is reviewed everyday as part of exchanges’ risk management process. Positions with Isolated Margin accounts will be automatically liquidated in case of a margin call.
Cross Margin means all positions can have access to one joint margin pool, meaning traders can tap into all available equities in their margin account. Please note that with cross margin on Bitget, one trader may have several margin pools of different cryptocurrencies. Only open positions with the same settlement (crypto-)currency can make use of the corresponding joint pool.
As a holistic portfolio approach, Cross Margin is usually adopted by traders with a more long-term strategy to avoid unwanted liquidations on positions with the same settlement currency. This also limits traders’ control over a particular position, but Bitget users can switch between Cross Margin and Isolated Margin mode at will to better improve their portfolio performance.
- Traders always need to establish a proper risk management strategy to actively manage their funds. Speculative trades at high leverage should be monitored closely in the Isolated Margin mode;
- An order record with details on the margin mode is generated immediately after a new position is opened on Bitget for better monitoring and management;
- Adding more margin to an existing position and changing between margin modes are available on Bitget;
- When a Bitget trader (please see Bitget Copy Trade: The Basics) switches a position to Cross Margin, Bitget will instantly notify his/her followers of the action.
4. Margin Trading for Crypto Derivatives
Margin trading is more popular in less volatile markets, such as the international forex market. But it can also be utilised for crypto derivatives and help more traders gain entry to the crypto market. The essence of margin trading remains the same for crypto derivative contracts with the following pros and cons:
Pros: Traders can significantly boost their profits with just a small amount of investment capital. Leverage on Bitget can get as far as 125X, allowing for extensive amplification of potential profits. Consequently, traders are able to diversify their portfolio by opening several positions at reasonably low costs.
Cons: The biggest issue with margin trading is the upsurge in trading risks; there is the possibility that losses incurred far exceed traders’ initial investments. On a highly volatile market such as crypto, traders must be aware of the substantial losses that come with market price movements.
5. Margin Trading with Bitget
Launched in 2018, Bitget is now the dominant crypto derivatives trading platform with multiple innovative products: Bitget Coin-Ⓜ Futures, Bitget USDT-Ⓜ Futures, Bitget USDC-Ⓜ Futures and Bitget Copy Trade. We focus on perfecting the design philosophy of our products and, most importantly, continuously improving customer experience. The three pillars of our customer orientation are integrity, transparency, and the preservation of a true “win-win” environment for all parties involved.
Our efforts have resulted in a huge customer base of 20 million users from 100 countries worldwide. In terms of scale, Bitget is indeed the world’s largest digital copy trading exchange with 100,000 professional traders and 410,000 followers, who have completed over 100 million trades combined.
One unique feature of Bitget is profits and losses are settled on a real-time basis. That also represents our guarantee for a sophisticated, accurate data system. Traders will be able to manage their account commensurate with the market, thus constantly in the process of improving their trading knowledge and skills.
Checking the requirements
The margin requirement for opening a new position (initial margin of a new position) is calculated as follows:
Opening margin = (Notional value/Leverage) + Estimated opening fees
Please remember that you may have to deposit more equity to open a new Isolated Margin account.
Changing margin mode
Traders can change the margin mode of their positions manually by going to the trading page and clicking on Switch the margin mode on positions.
Please note that:
- When switching, there should be no position, no open orders, and no current plan;
- You can close position, flash close position, and close position in the following order at cross/isolated margin mode;
- You can close position by limit order at cross/isolated margin mode.
Launched in late 2022, Bitget Spot Margin brings the advantages of margin trading to Bitget selected spot markets. There are currently 155+ spot margin trading pairs, with the highest leverage level being 10X. Check out the full guide to Bitget Spot Margin here.
Margin trading is certainly an attractive option for not only traders with limited investment capital, but also for those who seek magnified profits. We advise you to also implement thorough risk management and mitigation tools to avoid amplified risks.
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