In traditional finance, margin trading refers to when an investor borrows money from a broker to purchase more shares than they could afford on their own. The borrowed money is known as margin. When margin trading, you are using borrowed assets, or leverage, to increase your potential profits (or losses).
In the cryptocurrency space, margin trading is often used to increase the trader’s exposure to a particular digital asset, which can result in greater profits if the price of the asset increases. It can also increase the risk of losses if the price of the underlying asset decreases.
Isolated margin allows traders to open siloed positions for each market (i.e XYZ/USD). Traders can trade on margin without the risk of their positions being closed out by the exchange in the event of a price drop. This means, each position can only lose up to its position margin, and if liquidated, other open positions and balances remain unaffected.
On CoinFLEX, isolated margin is available for Permissionless Perps.
Four key metrics to know
In trading, leverage refers to how much buying power someone wishes to use through borrowed capital. While leverage magnifies gains, it also magnifies losses and puts traders at risk of liquidation.
For Permissionless Perps, a trader using “3x” leverage with $1,000 in collateral can buy up to $3,000 worth of permissionless perp contracts.
Position margin refers to the initial margin required to place an order and open a position. (Remember margin is the amount of money that you need to borrow from the exchange in order to buy or sell assets.)
On CoinFLEX, when you place an order, the system will check whether you have sufficient collateral to cover the position margin. When the order is accepted into the order book, this margin will be isolated and unavailable until the order is canceled. Once the order matches, the isolated margin becomes position margin. Margin can be added or withdrawn from the position margin.
Margin balance corresponds to the real-time margin used to support your open position and is calculated by taking the sum of all position values (unrealized profit and loss) and subtracting any outstanding borrowings (position margin).
Risk management is a core pillar of CoinFLEX. The following two key concepts are safety mechanisms that CoinFLEX has in place to ensure traders are better able to manage the risk of their positions on the exchange.
Maintenance margin refers to the minimum amount of margin required to keep a position open.
On CoinFLEX, positions are liquidated (automatically reduced/closed) when a position’s margin balance falls below the maintenance margin. If a trader’s margin balance enters bankruptcy, then the position may be auto-deleveraged (ADL) if the insurance fund cannot support the loss.
Bonus concept: Auto-deleveraging
Auto-deleveraging (ADL) refers to the process whereby an exchange or trader can automatically sell assets in order to cover margin calls and meet liquidity needs. ADL usually occurs when the price of an asset drops below a certain threshold, at which point the exchange will automatically sell assets in order to prevent further losses.
Please refer to our Isolated Margin support documentation to detailed examples of the concepts explained in this article.