Introduction
Margin and derivatives trading offers advanced strategies for traders seeking to amplify their exposure to various digital assets. This guide explains the core concepts, mechanisms, and risks associated with these sophisticated financial products. By understanding how these instruments work, you can make more informed decisions in the dynamic world of digital asset trading.
Engaging in these trading activities involves significant risk and is not suitable for all investors. It is crucial to fully comprehend the terms, conditions, and potential outcomes before participating.
Core Trading Services Explained
What is Margin Trading?
Margin trading allows you to borrow assets to open positions larger than your account balance would normally permit. To begin, you must deposit virtual assets or eligible fiat currency to serve as collateral, known as margin. This margin acts as security against potential losses incurred from your trading activities.
The platform may offer leverage, expressed as a multiple of your deposited funds, to increase your trading power. The specific amount of leverage available is determined by the platform and is subject to applicable laws. It is important to note that leverage can magnify both gains and losses. 👉 Explore more strategies for managing leverage
Overview of Derivatives Products
Derivatives are financial contracts whose value is derived from an underlying asset, such as a virtual currency. The main types include:
- Futures Contracts: Agreements to buy or sell a specific asset at a predetermined price on a set future expiration date.
- Options Contracts: Contracts that give the holder the right, but not the obligation, to buy or sell an asset at a specified price on or before a certain date.
- Perpetual Contracts: Similar to futures but with no expiration date. They utilize a funding rate mechanism to keep their market price aligned with the spot price of the underlying asset.
Retail investors are often restricted to margin trading only, while other derivative products may be available to users classified as qualified or institutional investors based on regional regulations.
Account Modes and Trading Mechanics
Understanding Your Trading Account
To use these services, you must fund your trading account. The platform provides different modes to manage your margin and risk:
- Spot and Futures Mode: Settlements and margin are isolated to the specific virtual asset being traded.
- Multi-Currency Margin Mode: All assets in your account are converted to a USD equivalent to serve as a shared margin pool across positions.
- Portfolio Margin Mode: Positions with the same underlying asset are grouped into risk units for calculating margin requirements holistically.
Access to Multi-Currency and Portfolio Margin modes may require maintaining a minimum account equity. You can also often use an "Isolated Margin" mode to restrict the collateral allocated to a single position, thereby limiting potential losses to a specific amount.
The Trading Process: Opening, Maintaining, and Closing Positions
The process for both margin and derivatives trading follows a similar structure:
- Opening a Position: You place an order to buy or sell. To open a position, you must meet the initial margin requirement.
- Maintaining a Position: You must maintain a minimum maintenance margin level to keep the position open. This requirement fluctuates based on the position's size and the market price.
- Closing a Position: You can close a position at any time, at which point any realized profit or loss is credited or debited to your account.
It is your sole responsibility to continuously monitor your margin levels to avoid liquidation.
Risk Management Tools and Procedures
Early Warning System and Margin Ratio
Your trading account health is measured by the Margin Ratio, a metric comparing your equity to your maintenance margin. A higher ratio indicates a healthier account.
The platform provides an early warning notification, typically when your Margin Ratio falls below 300%. You may receive this alert via email or through the platform interface. Upon receiving a warning, you are strongly encouraged to deposit additional funds to increase your margin ratio and reduce the risk of liquidation.
Liquidation and the Insurance Fund
If your Margin Ratio falls to 100% or below, the platform reserves the right to liquidate some or all of your positions to cover the owed margin. This process may involve closing positions and selling assets, potentially incurring a liquidation fee.
In extreme cases, liquidation may not cover the full debt, leaving your account with a negative balance. An insurance fund exists to cover some of these deficits, but its protection is not guaranteed, especially during periods of high market volatility. You could still be responsible for negative balances.
Auto-Deleveraging (ADL)
In severe market conditions where the insurance fund is rapidly depleted, an auto-deleveraging mechanism may be activated. This system automatically liquidates the most profitable positions across the platform to stabilize the system. Users whose positions are closed through ADL do not incur trading fees and receive any profits from those positions.
Fees, Taxes, and Other Important Considerations
Understanding associated costs
Trading activities incur various fees, including but not limited to:
- Trading fees for opening and closing positions.
- Funding fees for perpetual swaps.
- Settlement fees.
- Liquidation fees.
All fee schedules are subject to change and are available on the platform's website. Additionally, you are responsible for paying any applicable taxes, such as Value Added Tax (VAT), which are added to the fees and commissions charged.
Representations and Responsibilities
By using these services, you represent and warrant that you will maintain the required margin levels, understand that the platform is not liable for losses from liquidation, and affirm that you comply with all applicable laws and regulations governing your activities.
Agreement Amendments and Termination
The terms of this agreement may be amended. It is your responsibility to review any updates notified through the platform or via email. You may only terminate your agreement and close your trading account after settling all outstanding liabilities. The platform also reserves the right to terminate this agreement at its sole discretion.
Frequently Asked Questions
What is the difference between initial margin and maintenance margin?
Initial margin is the amount of collateral required to open a new leveraged position. Maintenance margin is the minimum amount of collateral you must maintain to keep that position open. If your equity falls below the maintenance margin requirement, you are at risk of having your position liquidated.
How is the funding rate for perpetual contracts determined?
The funding rate is a periodic payment exchanged between traders holding long and short positions in a perpetual contract. It is calculated by the platform and designed to tether the contract's market price to the spot price of the underlying asset. The rate can be positive or negative, determining which side of the trade pays the other.
What should I do if I receive an early warning notification?
An early warning notification indicates your account's margin ratio is low and you are at risk of liquidation. You should immediately assess your open positions and consider depositing additional virtual assets or fiat currency into your trading account to increase your margin ratio and avoid forced liquidation.
Can I lose more than I invest in margin or derivatives trading?
Yes. Due to the use of leverage, it is possible to lose more than your initial investment. If the market moves significantly against your position and your account equity falls into a negative balance after liquidation, you may be responsible for repaying that deficit.
How are profits and losses calculated for derivatives?
Profits and losses for derivative contracts like futures and options are calculated based on the difference between the entry price and the exit or settlement price, multiplied by the number of contracts held. The platform is responsible for determining the final P&L at the time of settlement or position closure.
Where can I find more detailed information about contract specifications?
Detailed specifications for each derivative product, including contract sizes, expiration dates, and pricing details, are provided on the platform's website. 👉 Get advanced methods for analyzing contract specs These specifications are subject to change, and users are notified of amendments via email or platform announcements.