What is the relationship between leverage and margin?
All kind of trading and investments includes 2 aspects: profit & loss, and risk management. The leverage is the main tool to weigh these two aspects. On Bybit, the main function of the leverage is to adjust the initial margin rate used for your position. The margin, can be seen as collateral. It means how much risk the trader is willing to take on this particular investment.
The higher the leverage, the less the margin used. With the same amount of margin, traders can open a bigger-sized position and amplify their profits. But at the same time, the liquidation price of the position will be more prone to the entry price, meaning, the position is easier to be liquidated as there is not much room for the loss.
The lower the leverage, the more the margin used. With the same amount of margin, the position size that a trader could open might be relatively limited. This may not allow the trader to amplify the gains. However, the liquidation price of the position will be further away from the entry price, meaning, the position will not be liquidated easily as there is a larger room for the loss.
Bybit Adopts 2 Margin Systems
What is the Isolated Margin mode?
The isolated margin mode depicts the margin placed into a position is isolated from the trader's account balance. This mode allows traders to manage their risks accordingly as the maximum amount a trader would lose from liquidation is limited to the position margin placed for that open position.
What is the Cross Margin mode?
The cross margin mode uses all of a trader’s available balance within the corresponding trading pair coin type to prevent liquidation. When the trading pair's equity is lower than the maintenance margin, the position will be liquidated. In the event of liquidation, the trader will lose all his/her equity for that particular trading pair.
Can trader change Leverage under Cross Margin mode? How to calculate Initial Margin and Maintenance Margin under Cross Margin mode?
Under cross margin mode, the trader cannot manually select the leverage. Instead, the initial margin is calculated using the maximum leverage allowed under the current risk limit level. For example: For BTCUSD perpetual contract, under the lowest risk level, the maximum allowed leverage is 100x. The initial margin to hold position under this risk level is thus 1/100 of the position value, which means the system will use 100x leverage to calculate the maximum quantity of contract that can be opened.
The calculation of the maintenance margin is the same for cross margin mode and isolated margin mode. i.e. maintenance margin = position value * maintenance margin rate.
How is the leverage calculated under the cross margin mode?
The higher the effective leverage, the higher the risk of liquidation and the nearer the liquidation price to entry price. Unlike isolated margin mode where the trader can adjust the leverage, under cross margin mode, the effective leverage is calculated based on the trader’s position value as compared to the maximum possible loss of the position.
Effective leverage = position value / (available margin + position margin)
Position margin = Initial Margin + Fee to close + Unrealized P&L
The higher the effective leverage, the higher the risk of liquidation, as the liquidation price is closer to the entry price
How to calculate the ROI under Cross Margin mode?
The ROI calculation under cross margin mode and isolated margin mode are the same. The displayed unrealized P&L (%) is calculated against the position margin of the corresponding position.
Unrealized P&L (%) = Unrealized P&L/Initial Margin
Initial Margin = Position Value/Leverage
Fee to close the position = (Quantity of contract/Bankruptcy price) * Taker Fee
Unrealized P&L (Long position) = Quantity of contract * (1/entry price – 1/LTP)
At 8,000 USD/BTC, a trader bought 10,000 BTCUSD contracts. When Last traded price (LTP) rises to 8,100 USD/BTC:
Unrealized P&L = 10,000(1/8000- 1/8100) = 0.01543209BTC
Initial Margin = （10000/8000）/100 = 0.0125BTC
Is cross margin and isolated margin interchangable when having an open position?
Yes, cross margin and isolated margin are interchangeable anytime whenever the account has a sufficient margin and the change itself doesn't trigger immediate liquidation. Please be noted that when traders holding a hedged position for USDT contracts, changing from cross margin to isolated margin is not allowed.