Margin trading is a way of trading assets allowing you greater exposure than is possible with your account balance. Trading on margin can amplify profits and losses by enabling a trade position size larger than their account balance.
Some key terms related to margin trading are shown below:
- Initial Margin: the amount needed to open a trade on margin,
- Maintenance Margin: the amount needed to keep a margin trade open, and
- Leverage: the proportion of the leveraged position for the asset you are trading compared to the amount of funds in you account.
You must put up initial margin for the order to be submitted, which acts as collateral for the margin trade and is a fraction of the position’s value. If your account balance goes below the initial margin, your order will be cancelled. The initial margin is a fixed percentage plus a position multiplier that increases the required initial margin as the size increases.
Once you’ve entered a margin trade, the maintenance margin is the amount of funds there should be in your account to keep the trade open. The maintenance margin depends on the leverage used, the instrument you are trading and the size of your position. As with initial margin, a position multiplier increases the required maintenance margin as the size increases. If the account balance is about to drop below the maintenance margin, your open positions are liquidated.
Leverage refers to how much debt a trader takes on the enter a margin position. For example, leverage on Interdax goes up to 100:1, meaning that traders can trade up to 100 times the amount they have in their trading account.
Interdax offers perpetual swap contracts which allow traders to take leveraged positions in bitcoin. More cryptocurrencies will be added in the near future.
Margin Trading Example
Let’s say you want to margin trade BTC-USD using Interdax’s BTC-PERP perpetual swap contract. Assume the price of 1 bitcoin (BTC) is $10,000.
You have an account balance of $10,000 (or 1 BTC). You will then be able to open a trade position with a size of up to $100,000 (10 BTC), using borrowed funds to make up the shortfall between your chosen position size and your account balance.
If your trade is successful, your profits will be around ten times larger than if the same trade was done with $10,000 (or 1 BTC). However, if your trade goes wrong, your losses would be amplified by about ten times as compared to the same trade using $10,000. Your margin trade is said to be leveraged 10:1.