Navigating the world of crypto futures trading requires a solid understanding of key terms and mechanisms. This guide breaks down the essential terminology you need to know to manage risk and operate effectively within a unified margin account system.
Understanding Margin Ratio
The margin ratio is a critical indicator of your position's safety. A higher ratio signifies a safer position. Its calculation varies depending on your account's margin mode.
Isolated Margin Mode with Cross-Collateral
Margin Ratio = (Full account balance of the coin + Cross-position profit - Pending sell orders for the coin - Amount required for option buy orders - Amount required for opening isolated positions - All order fees) / (Maintenance margin + Liquidation fee).
The maintenance margin includes four components: leveraged borrowing maintenance margin, futures maintenance margin, perpetual swap maintenance margin, and options maintenance margin, all considering pending orders. The liquidation fee also comprises four parts: leveraged borrowing fees, futures fees, perpetual swap fees, and options fees. This structure prevents abrupt account risk changes and potential liquidation from filled orders.
Liquidation Fee = Leveraged borrowing fee + Futures & Perpetuals fee + Options fee
Here, the Leveraged borrowing fee = Borrowed position value User taker fee rate; Futures & Perpetuals fee = Futures & Perpetuals position value User taker fee rate; Options fee = Options position value * User taker fee rate.
Cross-Currency Margin Mode with Cross-Collateral
Margin Ratio = Effective equity / (Maintenance margin + Reduction fee)
The maintenance margin is calculated based on (Position quantity + Open order quantity).
The reduction fee is also calculated based on (Position quantity + Open order quantity).
Single/Cross-Currency Margin Mode with Isolated Collateral
Long Position: Margin Ratio = [Position equity - (Liabilities + Interest) / Mark price] / (Maintenance margin + Fee)
Short Position: Margin Ratio = [Position equity - |Liabilities + Interest| * Mark price] / (Maintenance margin + Fee)
Closing Position P&L
Calculating your profit or loss upon closing a position is straightforward.
Long Position Closing P&L = (Face value Contract multiplier Number of contracts) / Average opening price - (Face value Contract multiplier Number of contracts) / Average closing price
Short Position Closing P&L = (Face value Contract multiplier Number of contracts) / Average closing price - (Face value Contract multiplier Number of contracts) / Average opening price
Position Reduction and Forced Liquidation
Your position is at risk of reduction or liquidation when the market moves against you.
Under cross-margin, this occurs when your margin ratio falls to or below the maintenance margin rate plus the closing fee rate.
Under isolated-margin, it happens when the specific position's margin ratio falls to or below the maintenance margin rate plus the closing fee rate.
A tiered reduction system exists for larger positions (Level 3 and above). If the margin ratio is below the current tier's requirement but above the lowest tier's, the system will calculate the number of contracts needed to reduce the position by two tiers. This partial reduction cycle continues until the margin requirement is met or the position falls to a lower tier.
For positions in tier 2 or lower, or any position where the margin ratio falls below the requirement for tier 1, the system will immediately liquidate all contracts at the bankruptcy price (where the margin ratio is zero). This pre-liquidation mechanism helps prevent cascading liquidations and adverse price impacts (liquidation losses) in highly volatile crypto markets.
Once triggered, the liquidation engine takes over the position. The maximum loss is limited to the initial margin posted for that position. 👉 Explore advanced risk management strategies
Auto-Deleveraging (ADL)
Auto-Deleveraging (ADL) is a mechanism used during extreme market conditions or force majeure events when the insurance fund is insufficient or depleting rapidly (e.g., a 30% straight-line drop from its peak within 8 hours).
Instead of placing liquidation orders on the market, the system directly closes positions against counterparties with the highest profits at the current mark price. Those counterparties have their positions reduced and their profits converted into available balance. Using ADL prevents socialized loss across all traders.
Users affected by ADL receive notifications via SMS and email detailing the reduced position and price. A record of the ADL event is also available in the order center.
Insurance Fund
The insurance fund is a reserve used to cover losses from liquidations that cannot be filled on the open market (liquidation losses). It is funded by allocations from the platform and any remaining equity from liquidated positions.
Funds are segregated by product line (leverage trading, futures, perpetuals, options) and within each product line, by underlying contract and currency.
Daily at 16:00 HKT, the platform settles all gains or losses from liquidations and reductions that occurred since the previous day into the insurance fund account.
Order Modes: One-Way vs. Hedge
The primary difference between these two modes is flexibility in holding positions.
One-Way Mode (Buy/Sell): Users can simply buy or sell to open positions. This mode only allows holding a unilateral position per contract. Opposite directions offset each other, effectively merging into a single net position.
Hedge Mode (Open/Close): Users can place orders using four actions: Open Long, Open Short, Close Long, and Close Short. This mode supports holding both long and short positions simultaneously for the same contract. The margin, leverage, and quantity for each direction are independent and can act as a hedge against each other.
Note: The chosen mode applies to all contracts within futures/perpetuals. You cannot change the mode while you have open positions or orders.
Other Common Trading Terms
What do other common futures trading terms mean?
- Coin-Margined Contracts (Inverse Contracts): Denominated in USD, but the collateral asset and profit/loss calculation currency is the underlying crypto (e.g., BTC, ETH). For example, to trade a BTC inverse contract, you must hold BTC, and profits/losses are settled in BTC.
- USDT-Margined Contracts (Linear Contracts): Denominated in stablecoins like USDT or USDC, which are also used for collateral and profit/loss calculation. Holding stablecoins allows you to trade contracts for various cryptocurrencies, with settlements in stablecoins.
- Cross-Margin: All available balance in your account is used as collateral for your positions. The advantage is increased resistance to liquidation; the downside is that all assets in the account could be lost if liquidated.
- Isolated Margin: The initial margin locked when opening a position is the maximum possible loss for that specific trade. The advantage is that losses are capped; the downside is less resistance to liquidation compared to cross-margin.
- Leverage: Higher leverage amplifies both potential profits and potential losses. Traders must monitor market volatility closely and use stop-loss and take-profit orders effectively.
- Average Opening Price: The volume-weighted average price at which your current position was opened.
- Mark Price: The theoretical price of a contract used to calculate unrealized P&L and margin requirements. Using a mark price, often derived from major spot indexes, helps avoid unnecessary liquidations caused by anomalous market trades or illiquidity.
- Liquidation Price vs. Margin Ratio: In a unified account with multiple positions, the estimated liquidation price might not be accurate. The margin ratio is the definitive metric for assessing liquidation risk. A contract position is subject to reduction or liquidation when its margin ratio ≤ 100%.
Frequently Asked Questions
What is the most important metric to watch to avoid liquidation?
The margin ratio is the most critical metric. While the estimated liquidation price provides a reference, the margin ratio directly determines your position's safety. You should actively monitor this ratio, especially during high volatility, to ensure it remains healthy.
What is the key difference between cross-margin and isolated margin?
Cross-margin uses your entire account balance to support all positions, increasing buying power but risking all assets if liquidated. Isolated margin isolates the risk to the capital allocated to a single trade, protecting the rest of your account but making the individual position more vulnerable to price swings.
How does the mark price protect traders?
The mark price, based on aggregate spot market data rather than the futures contract's last traded price, prevents "liquidation cascades" caused by highly leveraged positions or market manipulation on the futures order book itself, leading to a fairer valuation for margin calculations.
What happens if I get Auto-Deleveraged (ADL)?
If you are on the profitable side of a trade and ADL is triggered, your position may be partially or fully closed at the mark price against a liquidated trader. Your realized profits from that closure are then added to your available balance. You will receive a notification detailing the event.
Can I switch between coin-margined and USDT-margined contracts easily?
They are distinct products. To switch the type of contract you are trading, you must close any existing positions in one type and use the appropriate collateral (the underlying crypto or stablecoins) to open a new position in the other.
Is higher leverage always better?
No, higher leverage is significantly riskier. It magnifies losses just as much as it magnifies gains. Using appropriate leverage based on your risk tolerance and strategy is crucial for sustainable trading. 👉 View real-time leverage and margin tools