What is Add Margin?
#Basic
#Futures
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1. What is Add Margin
Add Margin refers to the action of injecting additional funds to prevent liquidation when the market price moves unfavorably and the user's position margin in futures trading is insufficient to meet futures requirements. The purpose of adding margin is to ensure that the user has enough funds to cover potential losses and to prevent the position from being forcibly liquidated.
2. Add Margin Example
2.1 Add Margin Calculation Formula
- Forward Contract: Each auto margin addition amount = Avg. entry price * Futures size * Position quantity * Maintenance margin rate.
- Inverse Contract: Each auto margin addition amount = Futures size * Position quantity * Maintenance margin rate / Avg. entry price
2.2 Example (Using BTC/USDT Forward Contracts)
A trader opens a long position of 5,000 contracts (1 contract = 0.0001 BTC) with 10x leverage when the BTC/USDT futures price is 18,000. The current maintenance margin rate for the position is 0.4%. Suppose the estimated liquidation price for this position is 16,270.96. The remaining available margin for this user is 50 USDT.
When the fair price drops to 16,270.96, reaching the liquidation price, the auto margin addition process will initiate to prevent the position from being liquidated. According to the auto margin addition formula, we calculate the required additional amount as follows:
Auto Margin Addition Amount = Avg. entry price * Futures size * Position Quantity * Maintenance margin rate = 18,000 * 0.0001 * 5,000 * 0.4% = 36 USDT
The new liquidation price after the margin addition is calculated as follows:
Maintenance margin = Position quantity * Futures size * Avg. entry price * Maintenance Margin Rate = 5,000 * 0.0001 * 18,000 * 0.4% = 36 USDT
Position margin amount = Avg. entry price * Position quantity * Futures size / Leverage multiplier = 18,000 * 0.0001 * 5,000 / 10 = 900 USDT
Liquidation price = (Maintenance margin - Position margin + Avg. entry price * Position quantity * Futures size) / (Position quantity * Futures size) = (36 - 900 - 36 + 18,000 * 5,000 * 0.0001) / (5,000 * 0.0001) = 16,200
This calculation avoids the risk of the user's position being liquidated. It is important to note that these calculations do not consider trading fees and other factors, so actual data may vary.
If the BTC/USDT price continues to fall and reaches the new liquidation price of 16,200, the auto margin addition will be triggered again. However, it can only add the remaining available margin of 14 USDT this time, and a new estimated liquidation price will be recalculated.
3. Why Are Add Margin Notifications Triggered
You will receive an add margin notification when your account balance falls below the maintenance margin level. Margin addition notifications are typically triggered for the following reasons:
3.1 Market Volatility: Due to the unpredictability of market behavior, market fluctuations may cause your assets to decrease, even below the maintenance margin requirement. In such cases, you will receive an add margin notification.
3.2 Decision-Making Errors: If your judgment of market trends is inconsistent with the actual movement, your margin account may face the risk of adding margin. This is especially true for novice users who, lacking experience in futures trading, might be influenced by emotions while aiming for quick profits through futures trading, leading to decision-making errors and triggering margin addition notifications.
3.3 High Leverage Setting: Excessively high leverage will result in a smaller price fluctuation range, increasing the risk of margin addition. Even minor price fluctuations can cause significant asset losses in your account under high leverage.
3.4 Lack of Risk Management: Not implementing risk management strategies, such as not setting stop-loss during futures trading, increases the likelihood of needing to add margin.
The purpose of the add margin notification is to alert you to the status of your account funds and prompt you to inject additional funds to meet the margin requirements, thus maintaining the validity of your positions.
4. How to Add Margin Promptly
4.1 Monitor Account Balance: Regularly monitor your trading account balance and margin level. Keep a close watch on market fluctuations and the changes in your position values so you can take immediate action if necessary.
4.2 Set Alerts and Notifications: Configure alerts and notifications on the trading platform to receive timely reminders when your account balance approaches or falls below the maintenance margin level. On the MEXC platform, you can set your preferences to receive notifications via email, SMS, in-platform notifications, or push notifications when an alert is triggered.
4.3 Inject Additional Funds: If you receive an add margin notification, you need to inject additional funds into your trading account promptly.
4.4 Adjust Positions or Leverage: If you are unable to inject additional funds immediately, you can consider adjusting your positions or lowering your leverage. Reducing the position size or lowering the leverage can decrease the margin requirement, thus avoiding the need for margin addition. This may involve partially closing positions or adjusting your trading plan.
4.5 Risk Management Strategies: It is crucial to establish and adhere to effective risk management strategies. These include setting stop-loss orders, allocating funds wisely, avoiding overtrading, and other tactics that help reduce the risk of losses and the likelihood of margin addition.
5. How to Avoid Margin Addition
5.1 Sufficient Funds: Ensure you have enough funds to meet margin requirements before trading. Avoid using the majority of your funds for margin, and keep a buffer to cope with market fluctuations.
5.2 Set Reasonable Leverage: Set leverage levels reasonably and avoid over-leveraging. Excessively high leverage increases the risk of your positions, making it easier to trigger margin addition.
5.3 Strict Risk Management: Develop and adhere to strict risk management strategies. Set stop-loss orders to limit potential losses and allocate funds according to your risk tolerance.
5.4 Avoid Overtrading: Refrain from frequent trading and impulsive decisions. Overtrading increases the likelihood of margin addition, so remain calm and rational and follow your trading plan.
5.5 Timely Monitoring and Adjusting Positions: Regularly monitor market conditions and your positions. If market fluctuations lead to position losses, adjust the size of your positions promptly or take appropriate hedging measures to reduce risk.
Disclaimer: This information does not provide advice on investment, taxation, legal, financial, accounting, consultation, or any other related services, nor does it constitute advice to purchase, sell, or hold any assets. MEXC Learn provides information for reference purposes only and does not constitute investment advice. Please ensure you fully understand the risks involved and exercise caution when investing. The platform is not responsible for users' investment decisions.