I have a sad announcement for you: the vocabulary used in margin trading vary for each exchange, and it can get confusing when you switch from one to another. However, with some efforts you will surely end to figure out what corresponds to what. In this lesson we will use Bitfinex as a reference.
Obviously, you have to have funds in your margin wallet, either by depositing directly into it, or by transferring some from the exchange or funding wallets.
Only the margin wallet is taken into account when you trade with leverage, this means your other wallets can't serve as collaterals: they are safe in case of liquidation.
You can deposit USD and even cryptocurrencies into it. Both can serve as guarantee for lenders.
If you choose to deposit bitcoin or altcoins, keep in mind that their value are moving, thus, your collateral's worth will be varying in time. If your collateral's value falls at the same time your position is creating losses, it can lead you even faster to a margin call.
For beginners I recommend to only use USD.
“P/L”: acronym for Profits/Losses, sometimes spelled PNL
“Balance”: your balance is the value of your account. If one of your position is at loss or profit, your balance is not altered until you close the position.
“Equity”: your equity is the net value of your account. It takes into account the losses and profits of open positions.
Let's say you have a balance of $1000 with a running position giving you a $100 loss (a P/L of -100).
Then your equity would be equal to $900, while your balance would still be $1000, until you close the position.
You can see the coins available to borrow – and therefore, those available to margin trade – in the “funding” tab:
The order books you will find there – called “funding books” - shows you people competing for funding fees.
You don't need to use this tab, unless you want to lend money, or need to borrow big sums at special rates.
I present it to help you understand the whole process.
When you open a leveraged position on Bitfinex, your collateral needs to be at least 30% of that position.
Let's calculate how much you can borrow if you have 1000$ in your margin wallet:
Your collateral of $1000 is 30% of 3333.3. You can not borrow more than that.
This is your tradable balance:
This means the maximum leverage available is 3.33:1, you can get $3.33 for every dollar you have in collateral.
Another way to say it, is that you can leverage by 3.33x
It's not mandatory to use the maximum leverage. To lower risks, you could simply open a $2000 position. This would correspond to using a 2x leverage.
Note: the above is true when you hold USD as collateral. If you use BTC or altcoins, the collateral needs to worth at least 33% of the opened position. The maximum leverage, in that case, is 3.033x
The margin call level on Bitfinex is of 22.5%.
When your equity is at 22.5% of your position, you will receive a margin call.
For a position of 3333.3$ with a collateral of $1000, that'd mean $750:
Another way to see it, is: when the loss of your position is of your collateral minus 750$, you'll get margin called. In this case, that'd represent a loss of 250$
The liquidation level, also called the margin maintenance on Bitfinex, is of 15%.
For a position of 3333.3$ with a collateral of $1000, liquidation happens when you have a loss of $1000 - $500 = $500 on your position
Thus, when your position reach $2833.3:
Your required equity is of $500:
When you get liquidated, your position will be closed, leaving you with the remaining $500 balance (Due to trading and funding fees, this is an approximate number, but the difference is minimal).
The exchange will adjust liquidation price according to unrealized P/L, swap, ticker price slippage, collateral, claiming fees, etc...
It will show you the calculated price after you open the position, and it can vary a little from the price calculated below, which should be used only as a gross estimation.
Let's say you long at maximum leverage with $1000, with an entry price of $1500, you have a position of $3333.3 or 2.2222BTC:
Remember: you will get liquidated when your position reach $2833.3. This correspond to a price of $1275:
This is an approximate price which doesn't include trading and loan fees. Bitfinex will automatically calculate it for you.
If the exchange shows you a liquidation price of 0, it means your position is lower than your balance: you are not really leveraged, and therefore can't be liquidated.
Let's say you short at maximum leverage with 1000$, while bitcoin price is $1500, you borrow 2.2222BTC and they get automatically sold for $3333.3.
Bitcoin goes to $1200, you decide to close your position:
you buy back 2.2222BTC you owe, for only $2666.64
you keep the profit of 3333.3 – 2666.64 = $666.66 (heil Satan)
If Bitcoin rises, your equity will fall. Take the cases of price going to $1600:
you'd have to buy back 2.2222BTC for 2.2222 * 1600 = $3555.52
3555.52 – 3333.3 = $222.22 will be deducted from your balance if you cut your losses now.
The liquidation level on Bitfinex is of 15%.
For a position of $3333.3 with a collateral of $1000, liquidation happens when you have a loss of $1000 - $500 = $500 on your position
Thus, when your position reaches $3833.3:
This gives you a liquidation price of $1725:
Take the example of our long:
Considering we have enough collateral to do so, we want to increase our position.
This is very simple, we have to open another margin buy market order.
The amount of the position will increase, and the “BASE PRICE” will be the average price of all entries.
To decrease a long position, we have to execute a margin sell market order.
If we margin sell 1BTC, the position will be of 1.2222BTC
If we margin sell 2.2222BTC, the position will close and your P/L will be applied to your balance.
If we margin sell 4.4444BTC, the initially long position will become a short position of an amount of 2.2222BTC.
We saw one way to close the position by reducing it of its full amount with an order.
Another way to do the same thing is to use the close button:
This closes your trade with a market order and your P/L is credited as the same currency than your collateral
The second option is to “claim your position” with the claim button:
This feature mimics the standard non-leveraged buy/sell trades, in the way that it will credit your P/L either as USD or BTC.
Claiming a long position will credit you with BTC
Claiming a short position will credit you with USD