Equity Drain

Equity drain refers to the process where a trader's account equity is steadily eroded by losses, fees, and funding payments. In a leveraged position, this can happen even if the market price does not move significantly.

For example, if a trader is paying a high funding rate to maintain a long position, their equity will decrease over time. If the asset price then drops, the combined effect of the funding cost and the price loss can lead to a rapid depletion of equity.

This is a subtle but dangerous risk that often catches inexperienced traders off guard. It effectively forces the trader into a liquidation event, even if their initial trade thesis was correct but the time horizon was too long.

Monitoring equity drain is essential for maintaining long-term position viability in derivative markets.