Margin trading guide 2

In the previous guide we talked about basics of the margin trading. Also, I've attached some articles and video explaining the subject.

Link to that article (click)

Also, I want to remind you that Bitmex (exchange we use for margin trading) has its "testnet". You can play around and try whatever you want. It is demo version of Bitmex and don't use real money there. Upon registration, you will be credited with 0,1 XBT (BTC) on your balance. Useful to test all your questions. Click

Bitmex

Register on Bitmex and get 10% discount on your trading fees for the next 6 months: click (ref.link)

or just register on Bitmex without a fee discount (non-ref.link) click

Let's go thought some points once again.

Instead of $ - Bitmex has contracts. 1 contract = $1. So, 10000 contracts equals 10000 USD. Mind, that Bitmex uses XBT (BTC) for accounting all profits and losses. You get your profit in XBT, not in USD. Bitmex doesn't have any fiat (this is why it has no KYC).

Let's open one short position and break it down into steps. Note: we have total of 0,1 XBT (BTC) on our balance.

1) First of all, we decide how big our trade is going to be. Remember that we have only 0,1 XBT. Let's assume price of 1 BTC is around $10k, so we have $1000 in cash if we sell our 0,1 btc. But this is margin trading and we can use leverage. Let's choose x10. Now, we have $10,000 (ten times more than we actually have). As a collateral, we have to give our money to the exchange. The price of this trade for us is 0,0946 (let's round to 0,1 BTC). You probably already figured out that because we use x10, we need 10 times less money than our position. In this case its ~0,1 BTC.

Remember, you can lose only your money, exchange won't let you lose their money

2) We think that BTC is going to go down soon, so we go with short (sell option). We choose the price we are going to short from. This is limit order, so you can put any number, and when market will reach it - your order will be executed. You can also, pick "market order" and your order will be executed immediately. We click on short. Last confirmation order pops up:

Order value: the size of your trade (position) with x10 leverage

Cost @ 10x: how much it cost you (real money without leverage)

Available balance: just shows your total balance on exchange

Position size after execution: this is the size of your trade (remember, we choose to short (sell) $10,000 worth of XBT

Mark price: this is price controls your liquidation. Slightly different from real price. Read

Estimated liquidation price: at which point you will lose your money = will be liquidated

Mark price/Est.Liquidation difference: how much market can go against you until you lose your money (become liquidated)

Here, the most important thing that should be clear to you is last 2 lines.

"Estimated liquidation price" is the price you don't want your position to reach. When it reaches that - game over. So, whole idea of margin trading can be understood from this line: this is simple math. Let's do another quick and simple example:

Bitcoin is $10,000. You have 0,1 BTC. You know that BTC is overbought and soon will start to correct. You don't want to just sit and wait this correction and hold, you are a trader so you decided to short BTC. But you only have 0,1 BTC. If you sell it now - you will get only $1000, and when BTC will reach $8000, you will be able to buy back that 0,1 BTC you had and also be left with $200. So, your profit is $200. You might think this is not a lot of money, so you decide to use margin.

Here is how it different: you still have 0,1 BTC, but you ask an exchange to lend you money. You ask for x10. Now you have 1 full BTC. (0,1 x 10 = 1). So, everything the same as in regular trade, but instead of $200 you make $2000 (not exactly $2000 because you pay fees but anyways).

Here is how risk is different: remember, you risk increases as much as your position when using margin. Example: you opened the short like in our example above, but BTC goes against you, it goes up. So, because your part is only 10% (0,1 btc out of 1 btc), you can afford market to go against you only by 10%. When BTC reaches $11,000. You are forced to be liquidated. Exchange takes its $10000 and uses your $1000 to cover the difference in price. Really simple.

Here is good video explanation from youtube on shorting:

Another one:

Shorts vs. Longs

I am pretty sure we already talked about shorting enough so you have an idea how it works. The opposite side of it - long. I don't need to explain you what is this, cause you do it all the time. Buy low - sell high. But this time with leverage.

When using Bitmex, you should understand well how funding works.

Funding fee on Bitmex occurs every 8 hours, and when that happens either short or long traders pay a funding fee. It can be negative or positive, meaning that if a funding fee is negative - short traders pay, if positive - longs traders pay.

A negative fee means that the trader will receive a rebate. Funding rates change based on market lending rates.

Read full here (Read it here to get an idea. While this can seem complicated at first, you will understand it well eventually if read thoughtfully it just couple of times)

Market trends and margin trading

General piece of advice: go long when overall market is bullish (example: what BTC did from late October till late December) and go short when overall market is bearish (BTC since late of December). Of course, it's easy to tell now looking back at things. But you don't have to be perfect in time, you can wait till confirmation and then assume market return to bullish/bearish trend.

What's good about longs is that you can just open a x3 or x5 long position and sit on for weeks. Since this is perpetual contract - it has no expiration date. You can hold it even for months. Now, imagine going long on BTC back in November when it broke out of $10k and mass media FOMO started and riding it all the way up to $20k. Astronomical profits!

Trading mentality and margin

Be ready to lose all of your money.

What's bad about margin is that it gives you no second chance. If you make wrong trading decision - you can't just wait it out. You will be liquidated and lose your money. This is how it works, unfortunately. But quite often, market tend to reverse just few steps away from your liquidation price, so whatever happens - don't panic and close your position. Think, maybe you just underestimated the market, but overall was correct. Yes, you thought market will correct from here because clearly it was overbought and overheated. But for some reason it keeps going up against you. This is crypto, it usually goes further that we expected. Still, it is overbought and didn't correct for a long time, meaning it is inevitable. It is going to happen (correction) but a bit later. So, don't close your position at loss just because it didn't go your direction right after you opened a position. Watch it, if you believe it is going down - it will. Your losses are just temporarily.

But if, however, it never gets to your point. Take that loss. Learn from it. Practise risk and money management, don't margin trade with all of your money. Go partially. Always keep a reserve.

Reserve and your "second chance"

Remember our trade we opened earlier? Let's check it out now

We opened a "short position". Our liquidation price is 11811.

So far so good and BTC went down a bit since we opened it. We now have 3,54% of profit (0,0033 XBT) as unrealised PNL. Which means, you would get 3,54% profit you would close it now.

But imagine, BTC went up and we losing money (again, you will see a unrealised loss), but it doesn't mean a real loss until you close your position and realise that. BTC is around 11500 now, but you still believe that BTC as overbought as it was and just due to correction. You have one option to save yourself and avoid liquidation = Add margin.

Here how it works:

Closing a position

In order to close your trade (long/short) you have 2 options: you can either do by market closing your position:

Or you can use limit order in opposite direction. So, say you opened a short when BTC was $10000, and you want to close it at $8000. So, you just open a counter order (long in this case) at the $8000 mark.

Note that, your limit order will be placed in "Active orders", not in position. When BTC reaches $8000, your short will be closed with profit. Here is how it works:

Good luck! Be careful with margin trading, it is addictive and dangerous! Always take it easy, think and don't panic!

Thank you for attention!

Edward Morra