The article is a bit long, but it contains information that is essential to understand when trading contracts. Please be patient and read on~
Most friends who trade contracts will choose the default full margin mode when opening a position. The benefit is that all contracts share margin, as long as there is money in the contract account, there is no need to pay attention to any extra operations. It is convenient, but the terrible risk has quietly arrived.
Before expanding, we must first mention the basic operation of trading contracts—stop-loss. A normal trader will definitely set a stop-loss to prevent liquidation; this is a basic survival rule. If you haven't set one, please quickly understand the meaning of stop-loss. This common knowledge will not be elaborated on; here are the key points:
Stop-loss does not necessarily execute at the price you set!
Stop-loss does not necessarily execute at the price you set!
Stop-loss does not necessarily execute at the price you set!
For example, if you bought a strong altcoin in full margin mode at around 6 USDT, placing an order of 10,000 USDT, even though there is still 5,000 USDT cash in the contract account, you disciplinedly set a stop-loss price of 5.88, thinking you would only lose 2% or 500 USDT at most, and then went to sleep peacefully. The next day, you wake up to find—WTF? 5,000 USDT is gone?!
You frantically question customer service, asking what kind of malfunction the exchange had to lose your hard-earned money! But the reply you get is: Unfortunately, you have been liquidated.
It is hard to accept, right? But this can indeed happen, for example, the strong coin you bought is called: OM.
What is liquidation? It refers to the situation where an investor, due to severe market fluctuations, causes the account funds to be insufficient to cover losses, resulting in not only losing the entire margin but also owing debts to the exchange.
In simple terms: even though you set a stop-loss at 5.88, if a sudden large sell order appears, it can instantly smash the price to the floor, during which there is no liquidity for buying, making it impossible to complete the transaction at your 5.88 until it drops to 1 (for convenience, approximately an 80% drop). Finally, when it can be executed, the system calculates—an order quantity of 10,000 USDT lost 80%, so it needs to deduct 10,000 * 80% = 8,000 (not including forced liquidation fees). Upon checking, your contract balance is only 5,000, which is insufficient. Fortunately, the exchange is merciful and only deducts 5,000, so the remaining 3,000 does not need to be repaid (Note: Only exchanges that support risk protection mechanisms can waive repayment; otherwise, you may have to repay the owed amount to use the account normally).
Some people smile slightly at this point, thinking you deserve the lack of liquidity for trading altcoins; I only trade Bitcoin... Friends, are you familiar with the six major black swan events in the crypto world?
For this reason, many veterans will tell you that after opening a full margin contract, try not to leave too much money in the contract account, temporarily transferring it to spot or other places (liquidation will only deduct the balance of the contract account). However, the good timing for opening contracts is fleeting, and if you have to spend time transferring back and forth before each trade, you are likely to miss good price points.
When using full margin contracts, pay attention to another pitfall called 'joint margin mode.' If you enable it, when the OM is liquidated, assuming you still hold other contracts, the exchange will 'help you' close positions to cover the liquidation losses (you can switch it in the contract interface by clicking the three dots in the upper right corner > Preferences > Asset Mode).
After reading this case, you should be able to understand the terrifying aspect of full margin mode. Clearly enjoying hot pot and singing, suddenly, in an instant, it all goes wrong. Therefore, in the crypto world, before making money, ensuring your safety is the top priority. So what should you do?
The solution is: use isolated margin mode.
What is isolated margin? In simple terms: the margin for each cryptocurrency is separated. Even if liquidation occurs, only the margin for that particular coin will be deducted, and it will not affect any other coins or accounts. Returning to the previous example, if you only put 500 USDT as margin in the OM contract, then during liquidation, only that 500 will be deducted, and your other contracts and the 5,000 USDT in your contract account will remain intact.
Taking Binance as an example, you can generally see the words 'full margin' on the contract opening interface; clicking it will switch to 'isolated margin.' Below are some simple notes:
The margin when opening an isolated margin order is automatically added (currently cannot be customized). To simply understand, isolated margin = order quantity / contract leverage. For example, if you open a position with 10,000 USDT using 50x leverage, then 10,000 / 50 = 200 USDT will be automatically deducted as margin when placing the order, and the stop-loss ratio is approximately equal to 1 / contract leverage = 2% (to delve deeper, the liquidation price is determined not based on margin, but on 'maintenance margin,' which is a bit complicated to calculate, so just stick to the previous simple understanding, as you can manually add margin after opening a position).
In other words, if you pre-set an isolated margin order, think about the order quantity and stop-loss ratio in advance. For example, if you want to open a position of 5,000 USDT with a stop-loss within 5%, set the leverage to 20x and then place the order (you can still set your own stop-loss; however, the stop-loss price for this order must be set within 5% to be effective).
Not done yet; don't forget there is an important contract cost called 'funding rate' (you should be aware of this; if not, go check the Q&A). Isolated margin orders will only deduct this amount from their own isolated margin, so if a contract is held for a long time, its margin will gradually decrease. Therefore, it is necessary to timely add sufficient margin to prevent forced liquidation. As shown in the picture:
To prevent forced liquidation, you can refer to the 'liquidation price' and 'margin ratio' of the position. The 'liquidation price' will show the approximate liquidation point under current conditions. If it is higher than your stop-loss price, you need to add margin (the small plus sign next to the margin); the 'margin ratio' is also very intuitive. When it reaches 100%, it will be liquidated. Generally, if the margin ratio is a few percent, it is relatively far from liquidation and relatively safe.
The above are some key differences between full margin mode and isolated margin mode. From a safety perspective, it is strongly recommended to only use isolated margin mode when opening contracts. Don't complain about the hassle; after all, no one knows when the next black swan will arrive. No matter how small the probability is, if it lands on you, it is a hundred percent disaster.
