In futures trading, managing large positions is crucial for maintaining market stability. When a substantial position faces forced liquidation, it can trigger significant market volatility. This event might also lead to a cascade of automatic deleveraging for counterparties if the position size exceeds what the market can absorb.
To mitigate market impact and reduce the number of users affected by auto-deleveraging, a "Risk Limit" mechanism is implemented. This system requires larger positions to allocate higher initial and maintenance margins. By doing so, the probability of automatic deleveraging during the liquidation of a major position is minimized, thereby cushioning the market against excessive turbulence.
Key Points to Remember
- Manual adjustment of your risk limit is only necessary if you intend to hold over 100,000 contracts.
- Increasing your risk limit raises the maintenance margin required for the position and brings the liquidation price closer to your entry price, thereby elevating the risk of liquidation.
How Risk Limits Work
Risk limits are structured across multiple tiers. As your position size increases, so do the requirements for both maintenance margin and initial margin.
For instance, in the BTC perpetual swap market, each additional 100,000 contracts raise the maintenance and initial margin requirements by 0.5%.
(The specific risk limit values for other markets can be found within the trading interface's risk limit panel.)
| Position + Order Contract Quantity | Maintenance Margin | Initial Margin |
|---|---|---|
| ≤ 100K | 0.5% | 1.0% |
| ≤ 200K | 1.0% | 1.5% |
| ≤ 300K | 1.5% | 2.0% |
| ≤ 400K | 2.0% | 2.5% |
| ≤ 500K | 2.5% | 3.0% |
| ≤ 600K | 3.0% | 3.5% |
| ≤ 700K | 3.5% | 4.0% |
| ≤ 800K | 4.0% | 4.5% |
| ≤ 900K | 4.5% | 5.0% |
| ≤ 1M | 5.0% | 5.5% |
If your current position size plus a new order exceeds your existing risk limit tier, the system will prompt you to adjust your risk limit upward before proceeding.
Conversely, after reducing a large position, you must manually lower your risk limit tier to revert to standard margin requirements.
Example Scenario
Assume you hold 90,000 BTC perpetual contracts and wish to add another 20,000.
- Your total would become 110,000 contracts.
- This exceeds the 100,000 threshold, so the system will require you to adjust your risk limit to the 200,000 tier.
- After closing your 110,000 position, manually reset your risk limit to 100,000 to lower your margin obligations.
Adjusting Your Risk Limit
To modify your risk limit, follow these generic steps (note that exact UI elements may vary by platform):
- Locate and select the Edit Risk Limit button.
- Choose your desired Risk Tier and confirm the selection.
These adjustments help you align your margin requirements with your trading strategy and current market exposure.
For a deeper understanding of how these mechanisms can protect your portfolio, explore advanced risk management tools.
Frequently Asked Questions
What is a risk limit in trading?
A risk limit is a predefined threshold that determines the margin requirements for a position based on its size. It helps exchanges manage systemic risk by ensuring larger positions are adequately collateralized.
When should I increase my risk limit?
You should increase your risk limit only if your total open positions and pending orders exceed 100,000 contracts. Doing so earlier is unnecessary and may increase your liquidation risk.
What happens if I don’t adjust my risk limit?
If your position grows beyond your current risk tier, you will be unable to place new orders until you adjust the limit. This prevents unintended overexposure.
Can decreasing my risk limit reduce margin requirements?
Yes, lowering your risk limit after reducing position size will decrease your maintenance and initial margin requirements, freeing up capital.
How does risk limit affect liquidation price?
A higher risk limit increases your maintenance margin, which moves your liquidation price closer to your entry price, increasing liquidation risk.
Are risk limits the same across all trading platforms?
The concept is similar, but specific tiers and percentages may differ. Always check your exchange’s documentation for precise details.