Contract trading has become a popular way for traders to gain leveraged exposure to cryptocurrency price movements. Whether you're new to derivatives or looking to refine your strategy, understanding key mechanics like margin, liquidation, and risk controls is essential. This guide breaks down the most important concepts in contract trading—clearly, accurately, and with practical insights.
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Understanding Margin Ratio: The Foundation of Risk Management
The margin ratio is a critical indicator that reflects the health and safety of your position. A higher margin ratio means your position is further from liquidation, while a lower one signals increasing risk.
How this ratio is calculated depends on the margin mode and account structure you're using. Below are the main scenarios:
Single-Currency Margin Mode (Cross Margin)
In cross-margin mode within a single currency:
Margin Ratio = (Currency Balance + PnL – Sell Order Amount – Option Buy Requirements – Isolated Position Requirements – Pending Fees) / (Maintenance Margin + Liquidation Fee)Here, maintenance margin includes requirements for leveraged positions, futures, perpetuals, and options—all factoring in open orders. The liquidation fee covers potential taker fees across these products, preventing sudden risk spikes when pending orders execute.
Multi-Currency Margin Mode (Cross Margin)
For multi-currency cross-margin accounts:
Margin Ratio = Effective Margin / (Maintenance Margin + Deleveraging Fee)Both maintenance and deleveraging fees are calculated based on both open positions and active buy/sell orders, ensuring real-time risk assessment.
Isolated Margin Mode (Per Position)
In isolated margin, each position has its own dedicated margin. Calculations differ slightly between long and short positions:
- Long Position:
(Position Asset – (Liability + Interest) / Mark Price) / (Maintenance Margin + Fee) - Short Position:
(Position Asset – |Liability + Interest| × Mark Price) / (Maintenance Margin + Fee)
This separation limits risk per trade but reduces flexibility compared to cross-margin setups.
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How Is PnL Calculated in Contract Trading?
Profit and loss (PnL) calculation varies depending on whether you hold a long or short position.
Long Position PnL:
(Face Value × Contract Multiplier × Contracts) / Entry Price – (Face Value × Contract Multiplier × Contracts) / Exit PriceShort Position PnL:
(Face Value × Contract Multiplier × Contracts) / Exit Price – (Face Value × Contract Multiplier × Contracts) / Entry PriceThese formulas help you evaluate trade performance objectively. Always monitor your entry and exit prices closely—small price changes can lead to significant gains or losses under high leverage.
What Are Position Reduction and Forced Liquidation?
Forced liquidation protects both traders and platforms from excessive losses during volatile markets.
When the margin ratio drops to or below the sum of maintenance margin rate and closing fee rate, the system triggers either partial deleveraging or full liquidation.
Tiered Deleveraging Mechanism
- Level 3 and Above: If your position tier is high but still above the lowest threshold, the system will reduce your position by two tiers incrementally. This continues until the new margin ratio meets the required level.
- Level 2 and Below, or if the margin falls below the minimum tier requirement, full liquidation occurs at the bankruptcy price—where equity reaches zero.
This early intervention helps prevent cascading liquidations and cross-position contagion, especially during flash crashes or pump-and-dump events.
Liquidated positions are handled by an automated engine, and losses are capped at the initial margin posted—no further liability accrues.
What Is Auto-Deleveraging (ADL)?
Auto-Deleveraging (ADL) activates when extreme market conditions drain the insurance fund rapidly—currently defined as a 30% drop within eight hours.
Instead of waiting for market orders to close liquidated positions, the platform directly matches them against profitable counterparties at the mark price. The top-ranked opposing traders have their positions reduced accordingly.
After ADL:
- Affected users receive email/SMS notifications.
- Records appear in the order history as "Auto-Deleveraging."
- Profits from the match go directly into the counterparty’s balance.
This mechanism ensures platform solvency without requiring loss sharing among users.
What Is the Insurance Fund?
The insurance fund safeguards the platform against underwater positions after forced liquidations fail to cover losses (i.e., "clawbacks" or negative balances).
Key points:
- Funds come from platform contributions and surplus from successful liquidations.
- Each product line—leverage, futures, perpetuals, options—has its own isolated fund.
- Within each line, funds are separated by underlying asset and currency.
Daily at 16:00 HKT, the system reconciles gains or losses from recent liquidations and adjusts the fund accordingly—either injecting surplus or withdrawing to cover deficits.
This structure enhances transparency and stability across diverse trading pairs.
Open/Close Mode vs. Buy/Sell Mode: What’s the Difference?
Choosing the right trading mode affects how you manage positions.
| Feature | Buy/Sell Mode | Open/Close Mode |
|---|---|---|
| Directionality | Single-direction only | Supports dual-direction |
| Position Handling | Opposite trades offset existing ones | Allows separate long and short positions |
| Flexibility | Simpler for beginners | Better for hedging strategies |
In Buy/Sell Mode, placing a sell order closes part or all of an existing long. It's intuitive but limits advanced strategies.
In Open/Close Mode, you explicitly open long/short positions and close them later. This allows simultaneous long and short exposure on the same pair—ideal for arbitrage or volatility plays.
⚠️ You cannot change modes if you have active positions or pending orders.
Key Contract Trading Terms Explained
Let’s clarify some core terminology every trader should know:
Coin-Margined Contracts
Also known as inverse contracts, these use the underlying crypto (e.g., BTC, ETH) as collateral. Profits and losses are settled in that same coin. To trade BTC coin-margined contracts, you must hold BTC.
USDT-Margined Contracts
Known as linear or forward contracts, these use USDT as collateral and settlement currency. One account can trade multiple assets without holding each native coin—ideal for diversified portfolios.
Cross Margin vs. Isolated Margin
- Cross Margin: All available balance supports your position. Higher resilience to volatility—but total account loss possible upon liquidation.
- Isolated Margin: Fixed margin assigned per position. Risk is capped at initial investment, but less buffer against price swings.
Leverage
Platforms support up to 125x leverage. While higher leverage amplifies returns, it also increases liquidation risk. Use stop-loss and take-profit wisely.
Mark Price
Used to calculate unrealized PnL and trigger liquidations. Prevents manipulation by referencing external index prices rather than last traded price.
Liquidation Price & Margin Ratio
While estimated liquidation price gives a rough idea, always rely on margin ratio for accuracy—especially in multi-position accounts where interactions affect overall risk.
Frequently Asked Questions
Q: What happens when my position is auto-deleveraged?
A: If ADL triggers, your profitable opposing position will be partially closed at mark price. You’ll receive notification via email/SMS and see the record in your order history.
Q: Can I recover funds after a forced liquidation?
A: No. Once liquidated, the position is closed, and losses equal the used margin. However, losses are strictly limited to that amount—no further deductions occur.
Q: Why does the insurance fund matter to me?
A: A healthy fund reduces the chance of ADL events. When it's low, even stable positions may face involuntary closure during market shocks.
Q: Should I use cross or isolated margin?
A: Use cross for better capital efficiency if you’re confident in risk control. Choose isolated for strict risk containment per trade—especially useful in volatile conditions.
Q: How often is the insurance fund rebalanced?
A: Daily at 16:00 HKT. Any surplus or deficit from recent liquidations is settled into or out of the fund at that time.
Q: Can I switch between USDT and coin-margined contracts?
A: Yes—just select the desired contract type when opening a new trade. They operate independently within your account.
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