Maintenance margin is a crucial mechanism in trading designed to prevent forced liquidations. This article provides a detailed explanation of how maintenance margin is calculated, specifically for inverse perpetual contracts.
What Is Maintenance Margin?
Maintenance margin is the minimum amount of equity a trader must maintain in their account to keep a position open. If unrealized losses reduce the account equity below this required level, the position will be liquidated automatically.
As the value of a trader’s open positions and orders increases, reaching higher risk limit tiers, the required maintenance margin ratio (MMR) also rises. Each trading pair has a base maintenance margin rate, which adjusts according to these risk limit tiers.
For example, if a trader opens a BTCUSD position with a value not exceeding 150 BTC, the maintenance margin rate may be 0.5% of the position value. If the position grows to 300 BTC, the MMR could increase to 1%.
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How Maintenance Margin Ratio Is Calculated
The maintenance margin ratio for each position is determined using a tiered calculation method based on position value. When the position value exceeds a specific risk limit tier, the excess amount is subject to the MMR of the next tier.
Illustration with an Example
The table below outlines sample margin parameters for a hypothetical XYZUSD contract.
| Tier | Risk Limit (XYZ) | Maintenance Margin Rate |
|---|---|---|
| 1 | 0 - 10 | 1% |
| 2 | >10 - 20 | 2% |
| 3 | >20 - 30 | 3% |
| 4 | >30 - 40 | 4% |
| 5 | >40 - 50 | 5% |
Assume a trader buys 10,000 contracts at a price of 400 USD per contract using 10x leverage.
- Position Value = Contract Quantity / Entry Price
= 10,000 / 400 = 25 XYZ - Initial Margin = Position Value / Leverage
= 25 / 10 = 2.5 XYZ - Maintenance Margin = (10 × 1%) + (10 × 2%) + (5 × 3%)
= 0.1 + 0.2 + 0.15 = 0.45 XYZ
The maximum allowable unrealized loss before liquidation is therefore 1.95 XYZ (2.5 - 0.45).
Simplified Calculation Formula
For larger positions, manual tier-based calculations can be complex. The following formula simplifies the process:
Position Value = Contract Quantity / Entry Price
Maintenance Margin (MM) = (Position Value × MMR) - Maintenance Margin Deduction
Where:
MM Deduction for Tier n = [Risk Limit of Tier (n-1) × (MMR of Tier n - MMR of Tier n-1)] + MM Deduction of Tier (n-1)
Traders can refer to the margin parameters page for each contract to find relevant MMR and deduction values.
Practical Example
Consider the following sample parameters for an ETHUSD contract:
| Tier | Risk Limit (ETH) | Max Leverage | MMR | MM Deduction |
|---|---|---|---|---|
| 1 | 0 - 500 | 100 | 0.5% | 0 |
| 2 | >500 - 3,000 | 50 | 1% | 2.5 |
| 3 | >3,000 - 6,000 | 33.34 | 1.5% | 17.5 |
| 4 | >6,000 - 9,000 | 25 | 2% | 47.5 |
| 5 | >9,000 - 12,000 | 20 | 2.5% | 92.5 |
Note: These are example values. Always check the latest parameters before trading.
Example 1
Trader A opens a long position of 8,000,000 USD with 10x leverage when ETH is at 2,000 USD.
- Position Value: 8,000,000 / 2,000 = 4,000 ETH (Tier 3)
- Initial Margin: 4,000 / 10 = 400 ETH
- Maintenance Margin: (4,000 × 1.5%) - 17.5 = 60 - 17.5 = 42.5 ETH
The maximum unrealized loss allowed is 357.5 ETH (400 - 42.5).
Example 2
Trader B has an open long position of 8,000,000 USD at 4,000 USD per ETH with 10x leverage, plus a buy limit order for another 8,000,000 USD at 2,000 USD.
- Position Value: 8,000,000 / 4,000 = 2,000 ETH (Tier 2)
- Position MM: (2,000 × 1%) - 2.5 = 20 - 2.5 = 17.5 ETH
- Order MM: (8,000,000 / 2,000) × 1.5% = 4,000 × 0.015 = 60 ETH
- Total MM Required: 17.5 + 60 = 77.5 ETH
Once the limit order is filled:
- Total Position Size: 16,000,000 USD
- Average Entry Price: 16,000,000 / (2,000 + 4,000) ≈ 2,666.67 USD
- New Position Value: 16,000,000 / 2,666.67 ≈ 6,000 ETH (Tier 3)
- New Initial Margin: 6,000 / 10 = 600 ETH
- New Maintenance Margin: (6,000 × 1.5%) - 17.5 = 90 - 17.5 = 72.5 ETH
After the order executes, the maintenance margin requirement decreases to 72.5 ETH, allowing up to 527.5 ETH in unrealized loss before liquidation.
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Frequently Asked Questions
What happens if my margin balance falls below the maintenance margin?
If your equity drops below the required maintenance margin level, your position will be liquidated to prevent further losses. It is essential to monitor your margin levels regularly.
Can the maintenance margin change during volatile market conditions?
Yes, highly volatile markets can cause rapid changes in position value, which may push your account into different risk tiers and increase margin requirements unexpectedly.
How are open orders considered in margin calculations?
Open orders contribute to your total position value for risk tier calculations. Their maintenance margin is computed based on the tier corresponding to your total exposure.
Is there a way to reduce maintenance margin requirements?
Reducing position size, using lower leverage, or closing other open orders can help manage your margin requirements more effectively.
Do all trading platforms use the same margin calculation method?
While the concept of maintenance margin is standard, the exact formulas and tier thresholds can vary between platforms. Always review the specific margin parameters provided by your exchange.
Conclusion
Understanding maintenance margin is essential for effective risk management in leveraged crypto trading. By mastering these calculations, traders can better avoid liquidations and optimize their trading strategies. Always refer to updated platform guidelines and use risk management tools to stay protected.