Everyone who trades with leverage, be it on BitMEX, BitMAX or Deribit or which else bucket shop might be popping off right now, should be aware of how to use leverage correctly. Leverage is a tool to DE-RISK your trades actually, and indeed it can bring down the involved risk in your trades if you use it mindfully. Sadly the opposite is often the case. So let’s get through the basics of leverage trading and also debunk some myths on that way.
To leverage a position means basically that you borrow funds to be able to increase the position size in contracts while using less from your capital/margin. Depending on how you use this tool it can decrease the risk by decreasing the used capital and set funds free for other trades. At the same time, it can increase your chances of getting liquidated.
Important to note:
– High Leverage = Closer liquidation price
– Low Leverage = Distant liquidation price
Leverage for De-risking means:
– to free up capital for trades on several instruments, like hedges
– to enable you to keep less of your capital on an exchange in Seychelles.
Myth: Leveraged Trading is tied to expensive fees!
This is bullshit. The fees by BitMEX are calculated by contract size and by order type. If you buy 1000 contracts with 1x for 0.2510 BTC or 1000 contracts with 100x for 0.0028 BTC there is no difference in the charged fees. If you market
Cross Margin Leverage
Cross-Margin is an advanced form of leverage and a riddle to the most. However, it is easy if you know how it is calculated, but still a tool only to be used by advanced traders.
The usual leverage 1x – 100x is isolated, this means only the used margin is at risk. If you use 0.1 BTC for a trade in an account with 1 BTC the maximum you can lose is 0.1 BTC. Cross-Margin is different as it is not isolated anymore, it uses your entire balance in your account. This means a liquidation equals a completely wiped account. You cannot use liquidation as stop-loss as this means total destruction. If Cross, then stop-loss is a must.
Cross-Margin uses leverage dynamically and is ultimately defined by the position size divided by the account balance. This results in your liquidation price. Cross shows the ROE as if 100x was used.
Using Leverage – The De-Risking Way
Use Case 1: Free Up Capital
This is a nice method of using leverage completely risk-free: If you want to place the above example position of 1000 contracts at a XBT price of ~4000 USD, you’d place the order with 1x Leverage for 0.2510 BTC. Let’s say you go long and the price moves up $50 and you feel safe to put your stop/loss to your entry. Now you can switch the leverage to 100x without any risk! You will have the same profits, but you risk now only 0.0028 BTC for this position and you can work with the rest of it again on other pairs. Or enjoy the extra safety (like not risking much if a stop doesn’t execute). You can now lose only 0.0028 in this isolated trade, no matter what happens.
Use Case 2: Create Un-Liquidatable Leveraged Positions with CROSS
Cross has the reputation to be the most dangerous leverage option on BitMEX as it is not an isolated trade anymore and uses your whole balance. This is true – it can burn down your complete account with one major power move. However, it can also offer you the chance of leveraged positions which cannot be liquidated (or are
As you can see the price of XBT would have to reach a price out of imagination to liquidate my short position. With a 5 Bitcoin sized account, I can take easily a 10000 contract sized short position without risking a liquidation. On Cross, the above position would initially deduct 0.2967 BTC from my total margin and once we can
Use Case 3: Catch the Bottom with Leverage
OK, this is more of a theoretical use case, a mind game what would be possible. Let’s say we assume 3-4k is the bottom of Bitcoin in the bear phase and we want to ride a long-term position all the way up again. As this is a long position the theoretical option of getting liquidated is there plus we gotta keep in mind the funding rate, – hence this is still very risky. Actually, it doesn’t belong in this post, but I found the thought interesting in theory.
We would place a position, let’s say we place an order for 1000 contracts at $3.5k with CROSS enabled and a 5 BTC wallet. Our liquidation price would be $189.5 – so without stop/loss, the complete capital is still at risk theoretically. But if one would definitely want to take that gamble, this would be the way to be. On top, he could be laddering the 1000 contracts within the 3.5k to 3k range. Once the price starts to move up, he would raise the stop/loss accordingly and once stop/loss it is at the entry, he could go 100x and could ride a 100x leveraged position all the way up to 100k
Can I open a 50x Trade here?
If you see someone asking such a question or bragging about a high leverage trade, you can call him out as a noob. Why? Because it doesn’t matter and he didn’t get the basic thing:
IT IS NOT ABOUT THE LEVERAGE, IT IS ABOUT THE CONTRACT SIZE IN RELATION TO YOUR PORTFOLIO SIZE.
A person who brags about a 50x or 100x position is whether a) maintaining an oversized super-risky position which might get wick-
Think Leverage Different!
Leverage is not there to offer you a BitMEX Casino, it is there to limit your risked capital. A trader should really never become liquidated – I mean like never. Liquidation rate = zero = imp. You
a) always want to make use of trades with a proper risk/reward ratio and
b) obviously use a stop/loss for that.
Once you get it doesn’t really matter if you use 5x or 100x as the outcome will be the same if you calculate your position size properly in relation to your total balance, you will find much stuff funny which you find online in regards to leverage.
Screenshots in your Telegram chat groups/Twitter mean nothing!
If your Broseph in your Telegram chat group brags with screenshots like this:
Stay unimpressed – as the reality pretty sure looks like this if you see the full picture:
ROE Screenshots mean NOTHING. The only information they contain is that someone owns a position which is not in the red.
Increasing the Leverage In-Trade – Does it increase the profits?
Hooray, finally you hopped into a positive position. Damn, now you are on the right side of the trade, you wanted to play safe and used fewer funds and low leverage. But hey – you can switch to 100x. Should increase your profits 100x as well, right?
Now – this is something many novice traders tend to think or ask themselve. Switching the leverage button does not increase your profits, but decreases your risk a.k.a. your actual used margin on the position.
How To Calculate The Right Position Size for a Leveraged Trade?
The professionals by CryptoMedics have a great calculator designed for exactly that question. Feel free to copy it to your Google account and exploit forth and back: Position Size Calculator by CryptoMedics