Are There Mechanisms Other than Liquidation to Protect Traders from Divergence Risk?
While liquidation is the ultimate backstop, some platforms offer partial liquidation, where the system only closes a part of the position to bring the margin level back above the maintenance requirement. Traders can also use risk management tools like stop-loss orders, which automatically close a position at a predetermined price to prevent catastrophic losses before the maintenance margin is even hit.
Additionally, some exchanges are exploring more sophisticated systems, such as tiered margin requirements and socialized loss systems, to reduce the harsh impact of a full liquidation event on individual traders.
Glossar
Divergence
Analysis ⎊ In quantitative analysis, divergence represents a critical discrepancy between the direction of an asset's price action and the associated technical indicator, such as the Relative Strength Index or MACD.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Socialized Loss
Mechanism ⎊ Socialized loss, within cryptocurrency derivatives and options trading, describes the distribution of losses across a broader participant base than those directly holding a losing position, often amplified by leveraged exposure and cascading liquidations.
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
Tiered Margin Systems
Architecture ⎊ Tiered Margin Systems structure collateral requirements based on discrete levels of exposure or risk metrics associated with a trading account or specific asset class.
Risk Management
Exposure ⎊ Within cryptocurrency derivatives and options trading, exposure represents the aggregate risk arising from positions predicated on anticipated price movements.