The margin in your account is the amount of funds that are currently available to be used — “free margin” — or the funds currently used by a position — “used margin”. Margin is not deducted from your balance, but once margin is tied to a position it is not available for opening other positions, spot trading, or withdrawal.
All funds used to open the position come from Kraken’s margin pool. The used margin can be thought of as a form of collateral, set aside from your balance in case the position falls to the point of liquidation. However, keep in mind that your loss on the position can be larger than the used margin.
If you open a $5,000 long position in XBT/USD with 5:1 leverage, your used margin for the position is $1,000. But if you later close this position for Profit/Loss (P/L) -$2,000, you have lost $2,000 - twice as much as the margin.
The Kraken Margin Product has been designed to protect the integrity of the Kraken Margin Pools for the benefit of all Kraken clients. The goal behind building in self-executing triggers (liquidations) is to preserve the Kraken Margin Pools so that our assets remain available to all Kraken clients. Liquidations also serve as a mechanism to help avoid a situation in which clients are required to repay a negative balance with funds in excess of those currently in their Kraken Accounts.
It is important to note that margin is not the same as equity. Equity is the combined value of your collateral currencies and P/L, and margin level is your Equity divided by used margin, expressed as a percentage.
Suppose you currently hold 5,000 USD in your account balances. You have opened a long position with 5:1 leverage worth 15,000 USD. The Used margin for this position is 3,000 USD since 15,000 divided by the leverage amount (5) is 3,000. Your account now has 2,000 USD remaining in free margin. This means you are capable of opening additional positions valued up to 10,000 USD using 5:1 leverage (the maximum leverage amount). Let’s assume the position has been open for a short time and has achieved 5% profit. To determine your margin level at this moment, the system performs the following calculations.
Solving for Equity:
Equity = 5,000 USD + (5%×15,000 USD)
Equity = 5,000 USD + 750
Therefore, Equity = 5,750
Solving for Margin Level:
Margin Level = (5,750 ÷ 3,000)×100
Margin Level = 1.916 ×100
Therefore, Margin Level ≅ 191.6%