First, there are two important concepts to know: Initial margin and maintenance margin.
- Initial margin is the minimum amount required to open a position and keep it open.
For example, if someone wants to invest $1000 on an asset using 1:2 (x2) leverage, then they will need 50% initial margin, or $500, to invest in that asset.
- The maintenance margin is the minimum amount needed to prevent the position from being liquidated.
For example, a person has $500 in his Binance portfolio. He wants to invest all this capital in Bitcoin with a leverage of 1:2 (x2). If the liquidation price is 80% loss, then a 40% drop in Bitcoin (40% x leverage x2) will result in the liquidation of this person's position.
Since the liquidation price is -80% of the position, he will need to have at least 20% of his $500 in his wallet before being liquidated, or $100.
(When the user approaches this liquidation point, he receives a "margin call" from Binance telling him to add funds if he does not want to be liquidated).
Finally, because different users have different trading strategies, the Exchanges primarily use two different margining tools:
- Isolated Margin: When the investor opens a leveraged position in isolated margin, the risk incurred will only be impacted on the position in question. His maintenance margin will only be calculated in relation to the initial margin of the position. This means that the user only risks being liquidated in relation to the capital he has invested in the position.
- Cross Margin: Conversely, when the investor opens a leveraged position in cross margin, the risk incurred will be calculated on the entire portfolio. This means that the maintenance margin will itself be calculated in relation to the capital available on the whole portfolio. Therefore, even if a position suffers a loss of -100%, the user will not be liquidated as long as he has enough funds available on his portfolio.
For example, an investor has $1000 in his Binance Futures portfolio. He invests $200 in Bitcoin with a 2x cross margin. If his position suffers a loss of -100% (i.e. -$200), his position will not be liquidated because he will still have funds in his portfolio. This allows the investor to invest with leverage on several positions while limiting the risk of being liquidated.
If you would like more information about these margin concepts, please click here.