When you trade perps, you need to understand margin. It's the money you put up as collateral for your position. How you manage that margin determines how much you can lose and when you get liquidated.

What Is Margin?#

Margin is your collateral. When you open a leveraged position, you're not paying for the full size upfront. You're putting down a fraction and borrowing the rest. That fraction is your margin.

If the trade goes against you, losses come out of your margin. If your margin runs out, you get liquidated.

Isolated Margin#

With isolated margin, you assign a specific amount of collateral to each position. That position can only lose what you've assigned to it.

Example: You have $10,000 in your account. You open a long on ETH and isolate $1,000 as margin. If the trade goes wrong and you get liquidated, you lose that $1,000. The other $9,000 in your account is untouched.

Pros: You control exactly how much you risk per trade. One bad trade can't wipe your whole account. And it's easier to manage risk on individual positions.

Cons: If the trade goes against you, it liquidates faster because there's less margin to absorb the loss. You need to manually manage margin for each position. And you can't benefit from unrealized gains on other positions.

Mirrorly uses cross margin. Isolated margin is not currently supported. Your risk management is handled through settings like Limit Account Size and Maximum Position Size.

Cross Margin#

With cross margin, your entire account balance acts as collateral for all your positions. Everything is shared.

Example: You have $10,000 in your account. You open a long on ETH. If the trade goes against you, it can pull from your entire $10,000 before liquidating.

Pros: More buffer before liquidation since your whole balance backs the trade. Unrealized profits from one position can help margin another. And you don't need to manually allocate margin per trade.

Cons: One bad trade can wipe your entire account. It's harder to control risk on individual positions. And you can lose more than you intended if you're not careful.

Which One Should You Use?#

Use isolated margin if you want strict risk control per trade, you're trading multiple positions and want to limit exposure, or you're still learning and don't want one mistake to blow your account.

Use cross margin if you're running a portfolio strategy where positions hedge each other, you want more room before liquidation, or you know what you're doing and can manage overall exposure.

Most beginners should start with isolated margin. It forces you to think about risk per trade.

How Liquidation Works#

Liquidation happens when your margin can no longer cover your losses. The exchange forcibly closes your position to prevent the loss from going negative.

Here's the process:

1. You open a position with margin
2. Price moves against you
3. Your unrealized loss grows
4. When your remaining margin hits a threshold (maintenance margin), you get liquidated
5. Your position is closed and you lose your margin

Liquidation price depends on your entry price, your leverage, your margin amount, and whether you're on cross or isolated.

Higher leverage means your liquidation price is closer to entry. Less room for the trade to breathe.

Example#

You have $1,000 in isolated margin on a 10x long ETH at $3,000.

Position size: $10,000. Leverage: 10x. Margin: $1,000.

If ETH drops 10%, your position loses $1,000. That's your entire margin. You're liquidated.

If you had used 5x leverage instead, your position size would be $5,000 with $1,000 margin. ETH would need to drop 20% to liquidate you.

Lower leverage means more breathing room.

Fees and Liquidation#

Don't forget fees. Trading fees and funding fees chip away at your margin. Your actual liquidation point is slightly closer than the math suggests because fees reduce your margin over time.

Some exchanges also charge a liquidation fee when you get liquidated. One more reason to avoid it.

How to Avoid Liquidation#

Use lower leverage. Set stop losses before your liquidation price. Don't use your entire account on one trade. Monitor your positions, especially in volatile markets. And understand your liquidation price before you enter.

Margin and liquidation are the mechanics that make leveraged trading dangerous. Understand them before you size up. Isolated margin limits your downside per trade. Cross margin gives you more room but more risk. Pick the right tool for your strategy and always know where your liquidation price is.