Who it's for — Anyone trading derivatives or futures. Margin is the glue that holds the entire Leverage system together.
When you open a position using Leverage, the broker lends you money. Since the broker is a risk-averse entity (it certainly doesn't want to lose its money if your trade goes wrong), it asks you to temporarily lock a sum of money as collateral. This locked sum is the Margin.
In simple terms — Imagine renting a Ferrari (leveraged position). The rental agency (the broker) asks you to swipe your card to freeze a $2,000 security deposit (the Margin). As long as you bring the car back safely, the margin is unlocked. If you dent the car, the damages are deducted from your $2,000.
Initial Margin vs Maintenance Margin
- Initial Margin: The exact amount you must have in your account to open the position. If you want to open a $1,000 position at 10x leverage, the Initial Margin will be $100.
- Maintenance Margin: The minimum amount your account must maintain while the position is open, before the broker forcibly closes it to protect its own funds.
Isolated vs Cross
Crypto exchanges (and some traditional brokers) offer two modes for managing Margin:
- Isolated Margin: You commit only a fixed amount for that trade (e.g. $100). If you lose, you lose a maximum of $100.
- Cross Margin: The broker can tap into all the remaining capital in your account to prevent the single position from going into Liquidation. You risk zeroing out your entire portfolio because of a single unlucky trade. Highly not recommended for beginners.
Summary Sheet
- What it is: The collateral in real funds to use Leverage.
- Golden Rule: Never confuse Margin with Risk or Size. Margin is only needed to access Leverage; the Stop Loss determines the Risk.
Links
- leverage — The tool for which margin is required.
- liquidation — What happens if the market "eats" all your maintenance margin.
- bronze-path
Module: Module 3 — Orders and Operations
Know what happens when you click buy or sell.
