Chances are, whether you’re a new or more experienced trader, you’ve a fallen victim to over-leveraged trades. Subsequently, you’ve been liquidated due to the overwhelming urge to 50X-100X your money. Like a moth to a flame, the urge is just too powerful of a force for some to resist.
There’s no worse feeling in the world than having all your Bitmex funds liquidated (AKA REKT), but I’m here to tell you that you can put a stop to that here today, by following a few simple guidelines.
But first, let’s take a more in-depth look at what a leverage trade really looks like from the inside out for all you less experienced margin traders out there.
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A Little Background About Leverage Trading
When traders talk about using leverage, their simply implying the ability to multiply their initial investment (AKA – initial margin requirement) in order to produce a more size-able profit with less capital. So if you have $600 in your Bitmex account and would like to trade with $6000, you’d be using a leverage amount of 10X. This concept is fairly easy to understand for most.
If you make 2% on your trade, you’re profiting off that $6000, thus 10Xing your profit. It’s just an easy way for people to profit (or lose) within a shorter timeframe.
This is what initially drew me to margin trading on Bitmex, as well as many others just like me. The potential for quick profit is a powerful force that resides deep inside the human psyche. However, if you can’t control your risk and emotions, it’s a pipe dream that will quickly turn against you.
Now let’s dig a little deeper into a little something called “Maintenance Margin”.
What is Maintenance Margin
Futures Risk Management Systems like Bitmex require that your initial margin (your Bitcoin contracts that you hold inside your account) requires you to have a minimum amount of equity in order to keep your position active.
Unlike traditional stock market venues, where a broker liquidates you at market price once you reach your maintenance margin, Bitcoin derivative exchanges are a bit different. Exchanges like Bitmex want to make sure that you’re able to pay the profits of the person on the other side of the trade (hence why this is called a swap contract) to ensure that they are not left holding the bag in case your position quickly moves against you.
When trading futures on Bitmex, you’re actually trading what’s called a Limited Risk Futures Contract. This basically means that you can view the value of your initial margin as the trade progresses.
The company’s pay profile is a huge reason why Bitmex is the “go to”choice for traders who seek to exponentially increase their profit, with limited downside. However, the pay profile looks almost exactly like any other financial option, as you can see from the illustration below.
So then why would Bitmex allow you such an accommodating position? There has to be something in it for them right? Of course there is! They’re not in it for charity, that’s for sure.
Their “house edge” is determined by the maintenance margin requirement (MMR) which is a part of their proprietary Liquidation Engine you might have heard so much about.
This automated system is a way to close out positions that have moved against the trader and have started to eat away at their initial margin. The liquidation engine takes into account the relationship between the MMR and initial margin which will vary according to the amount of leverage that the trader is taking on.
Let’s explore this a little further…
Bankruptcy Price and Liquidation Price
Bitmex utilizes 2 determining factors for its liquidation engine. The bankruptcy and liquidation price.
The bankruptcy price is when your initial margin has been completely eliminated so that your loss for the position is at 100%. The liquidation price is when you have exhausted your MMR and the price at where your position will be closed. This is primarily used to protect Bitmex from potentially quick moves in the price action of Bitcoin.
You’re most likely already aware that your liquidation price is given to you within the order form popup that displays right before you place a trade. You can also find it located inside their handy-dandy calculator so that you can properly calculate your risk before placing your order.
So what about bankruptcy price? Where’s that at?
It’s hidden and for good reason (well at least to Bitmex that is). By hiding the bankruptcy price, you’ll never truly know how much room your trade has to move before your initial margin is completely exhausted. Bitmex is now able to keep you in the dark with regard to how much of your initial margin will be eaten up before your trade is liquidated.
Please note: the bankruptcy price is only hidden from the Bitmex calculator. Once your order has been executed, your liquidation price is given to you. This price is static (unless you add or remove from your order), so there’s no need to worry about surprise liquidations.
Let’s delve a little deeper and take up closer look at this statistical edge and how to calculate it before placing an order.
The Bitmex Statistical Edge
Once your position is close to being liquidated, you will be denied extra “price participation”(placing another order), thus giving you a chance for market recovery. In this scenario, Bitmex has the statistical edge over the long haul.
In order to give this a bit more context, let’s take a look at a few calculations below regarding the bankruptcy and liquidation prices and the result on your margin rates.
BTW, you can come up with these rates yourself utilizing this handy tool over at AntiLiquidation.com
The image shows the amount of “Theoretical MMR” you’ll have when trading on Bitmex as well as how large it is compared to your initial margin. When viewing over these 2 columns, can get an idea of how much initial margin and MMR are being applied to each trade.
Take a look at the column labeled “Maintenance Margin” and how much it increases as you take on more leverage (this should be expected). However, what’s surprising here is the amount of MMR that makes up it up. It exponentially increases the percentage of your initial margin when trading with a higher leverage.
For example, if you were to trade at 100X, you would only have to move $35 away from the current price before you you’re completely liquidated. When trading with an initial deposit of $70, you’ll quickly be liquidated when only moving at half that position to $35 MMR.
On the other hand, when taking a look at a trade with 10X leverage you’ll see that this calculation is much less pronounced. For example if you have an initial margin of $640, you won’t be liquidated until you’ve reached $610 from your initial margin. This is more than 10 times below what is required of the initial margin when using 100X leverage. That’s quite the difference.
In summary (as if it weren’t blatantly obvious), the odds have greatly turned against you when using 50X to 100X leverage. As you can see, it’s not the most efficient way to trade and isn’t the most probable one to win either.
Your take away from all this should be to never trade anything over 25X, unless of course, you enjoy the gamble, because that’s exactly what you’re doing with any leverage higher than that.
When trading anything over 10X, you always want to make sure that you’re using a well-placed stop loss, which covers the next segment of this guide.
Why You Should Use a Proper Stop Loss
No matter how you slice it, trading on Bitmex is a risky endeavor. What makes it exponentially more risky is failing to use a stop loss or exit a losing trade via a mental stop loss (for some of you more experienced traders).
As I’m sure you’re already aware by now, trading within the crypto market comes with extremely volatile swings. You can be trading between 1 to 6% swings one day, and 10 to 20% swings on another. This makes it damn near impossible to gauge a consistent range when swing trading. These massive swings are not only reserved for low market cap tokens, but are also found within the top 10 cryptocurrencies as well.
Personally speaking, I’ve fallen victim to trading without stop losses more times than I’d like to admit, however with as many losses as I’ve taken throughout the years, I simply don’t trade without them anymore (for a more detailed guide on stop losses, click here)
I don’t care how impressive your win/loss streak is, it only takes one bad trade to lose it all.
With that said, let’s go over the stop loss strategy you should be using on all your Bitmex trades.
Preventing Liquidation with the Market Stop Loss
Preventing liquidations are not only a great trading practice, but can save you from losing your ass when used wisely. Chances are you’ve already been there done that (hence why you’re reading this article) and have the T-shirt to prove it.
What most people don’t realize is, Bitmex will hit you with a liquidation penalty as opposed to getting out on a margin call (like a stop loss). Let’s go through a scenario with 100X leverage, which is obviously not advisable, but for the sake of demonstration, let’s take a look.
In order to actively fill the requirements of the trade you’ll need 1.1 BTC, which is a little more than 1%. You’ll also have to cover an exit fee on the position for the potential funding. Your liquidation price for this long trade is $1044.78 which is slightly more than $5 dollars below your entry.
Once this price has been met…. welcome to “liquidation street”, home of the bitter and REKT.
However, you don’t have to be another victim. If you simply set a stop loss right before your liquidation price and sell out of your position at $1045, your loss would only amount to -0.456 BTC.
So by utilizing your stop loss, you still have 0.65 BTC left to trade with. That’s better than being left with a big fat 0 after being liquidated right?
Leverage trade responsibly by taking maintenance margin into account so that you can manage your own risk before placing a trade. However this doesn’t necessarily equate to systematically placing the odds in your favor. More times than not, your trade will get liquidated if you decide to use a leverage higher than 50X.
- Use the AntiLiquidation tool to figure out exactly where you should be on your trade and the exact amount you’re risking.
- Always, always, always use a stop loss. Whether it’s a hard stop or mental stop loss, you need to make sure it’s in place and stick to it! Trends can reverse “at the drop of a dime” and you don’t want to be caught on the other side of that emerging trend waving your profits goodbye.
- Utilize the market stop loss as it ensures you exit the trade when you need to most. Dips and spikes can happen quickly. If you insist on trying to save yourself that taker fee, use the limit stop loss, and at least be close to your computer in case your order doesn’t get filled.
- If you find yourself feeling lucky, and have still rationalized your way into trading with high leverage, use 25X and below with a tight stop loss. This will, at the very least put the odds (somewhat) back in your favor. Trading above 25X greatly puts the odds back in favor of Bitmex.
As always, if you have any further questions, leave a comment below.
Best of luck and happy trading!