Key terms
If you are just starting to understand futures, you need to grasp three key terms: margin, liquidation, and PNL.
Let's go in order
What is margin?
Margin is the money you put up to open a trade. It's like a deposit you leave on the exchange.
How it works:
- You have $10.
- You decided to open a trade with 5x leverage.
- The exchange multiplies your $10 by 5, and you trade as if you have $50.
Your actual $10 is the margin. It stays on the exchange to cover potential losses.
❗️❗️❗️Important:
If the price goes against you, and losses start approaching your margin, the trade will close automatically (this is called liquidation).
The exchange closes your trade to avoid losing money you owe them.
📌Why this happens:
- You use leverage to trade for an amount greater than you have.
- If the price changes significantly against you, your margin will start to decrease.
- When losses reach your margin, the exchange closes the trade to cover the losses.
Example:
- You opened a trade with $10 and a 5x leverage (position of $50).
- The price went against you, and the loss reached $10.
- The exchange will close the trade because your margin is fully utilized.
How to avoid liquidation?
- Use small leverage (2x–3x).
- Set a stop-loss — this is an automatic closure of the trade if the price goes negative.
What is PNL?
PNL is your financial status in the trade: profit or loss.
Types of PNL:
1. Unrealized PNL (unrealized profit/loss):
- This is how much you have earned or lost so far while the trade is still open.
- For example, if the price has increased, you see your profit, but it is not yet realized.
2. Realized PNL (realized profit/loss):
- This is the profit or loss you realize after closing the trade.
#### Example:
- You opened a long position on BTC when the price was $94,455.
- The price has risen to $95,000.
- Your Unrealized PNL shows how much you could earn if you closed the trade right now.
- If you close the trade, PNL becomes Realized, and the money will be credited to your account.
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- Margin: Shows how much money you are putting into the trade.
- Liquidation: Helps to understand where you will lose everything if the price goes against you.
- PNL: Shows how much you are earning or losing at the moment.
If you understand these terms, it will be easier to manage trades and not lose money.
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