Types of Margin

Understanding margin is essential for managing risk and maximizing capital efficiency when trading with leverage. On VDEX, margin refers to the collateral provided to open and maintain leveraged positions.

This section explains:

• The two core types of margin: Initial Margin (IM) and Maintenance Margin (MM).

• The two margin modes: Cross Margin and Isolated Margin.

A clear understanding of these concepts supports better risk management and reduces the likelihood of liquidation.

Initial Margin (IM):

Initial margin is the amount of collateral a trader must provide to open a leveraged position. It acts as a security deposit, ensuring the trader has sufficient funds to cover potential losses.

Formula: Initial Margin= (Quantity of asset × Entry Price) / Leverage

Key Characteristics:

• Required at Position Opening: The trader must deposit this margin before opening a trade.

• Cannot Be Withdrawn (Cross Margin): For cross-margin positions, this margin remains locked and cannot be withdrawn.

• Adjustable for Isolated Margin: Traders using isolated margin can add or remove margin after opening a position.

Maintenance Margin (MM)

• Definition: The maintenance margin is the minimum amount of collateral required to keep a leveraged position open. If the account balance falls below this threshold, the position is at risk of liquidation.

• Formula: Quantity of Asset × Entry Price × Maintenance Margin Rate

Key Characteristics:

• Lower than Initial Margin: The maintenance margin is typically a fraction of the initial margin.

• Prevents Liquidation: If a trader’s account value (including unrealized PnL) falls below this threshold, their position may be liquidated.

• VDEX Setting: On VDEX, the maintenance margin equals half the initial margin at maximum leverage.

Cross Margin

Definition: Cross margin is a margin allocation method where all open positions share the same pool of collateral within a trader's account balance.

• Shared Collateral: All positions draw from the total available balance, allowing profits and unused funds from one trade to support others.

• Loss Offset: If one position is losing, funds from the remaining account balance can help prevent immediate liquidation.

• Liquidation Risk: While this can reduce early liquidations, a significant loss on one position can potentially wipe out the entire account balance.

• Best for: Traders seeking maximum capital efficiency across multiple positions.

Example:

• Account balance: $1,000

• Three trades opened, each using $100 margin (total used = $300).

• If one trade loses value, remaining funds in the account help keep the position open.

Isolated Margin

Definition: Isolated margin is a margin allocation method where each trade is assigned its dedicated collateral, independent from the rest of the account balance.

• Separate Collateral: Every position has its margin allocation that does not affect other trades.

• Risk Containment: If a trade is liquidated, only the funds allocated to that position are lost, protecting the remaining balance.

• Adjustable Margin: Margin can be manually added or removed from an isolated position after it is opened.

• Best for: Traders seeking to limit risk on individual trades or maintain strict position-by-position control.

Example:

• Account balance: $1,000

• A trade is opened with $100 margin in isolated mode.

• If the trade gets liquidated, only $100 is lost, and the remaining $900 stays safe.

Choosing the Right Margin Mode

• Cross Margin: Offers greater flexibility but carries higher risk, as losses from one position can impact the entire account balance.

• Isolated Margin: Provides stricter risk control by limiting potential losses to the margin allocated for each position.