A Quick Starter Guide to Leveraged Trading at BitMEX
Tags: Bitcoin, Investing, Finance, Cryptocurrency, Bitmex

(Ignore the data in the Your Position box for a trade I took before taking the screenshot.)

The Place Order Box

Quantity: The quantity of the trade is $11,670. This is your position. But the money you place at risk is less than this, depending on what leverage you choose. The higher the leverage, the less you place at risk, but the greater the probability of losing it.

Cost: The cost is 0.1015 BTC i.e. $1,184.

Cost = Initial Margin+ (2 x Taker Fee)

Cost = (1/Leverage x Position) + (2 x Taker Fee)

= (1/10) x 11,670 + (11,670 x 0.0015)

= $1,184.50

This is the maximum you can lose. You lose the entire amount should the price fall by 10% from $11,670 to $10,500. If the price was to crash to $5,000 your loss is still limited to $1,167 which is the value of your Initial Margin.

Order Value: The value of your position is 1 BTC i.e. $11,670. (0.9889 BTC to be exact.) Fees are calculated on this amount.

Available Balance: This is how much you have available for trading. Cost must be lower than Available Balance to execute the trade.

Profit & Loss Scenarios with 10x Long

Note that your profit can exceed 100%, indeed it is unlimited, but your loss is limited to 100% (i.e. $1,167) , however much the Bitcoin price falls.

Profit & Loss Scenarios with 10x Short

Again, as with the Long, your profit can exceed 100% by orders of magnitude. (Profit is unlimited with Longs, but there is a theoretical maximum limit with Shorts which is the profit when the price has fallen by 100%, as the price cannot fall further and become negative.) Your loss is limited to 100%, however much the market rises.

This asymmetry (unlimited profit, limited losses) is the beauty of the BitMEX Limited Risk contract, which is a BitMEX innovation. Trading Futures Contracts on the CME or CBOT, for example, there is no such limited risk facility. With standard futures contracts the Exchange will Margin Call the client for Maintenance Margin to supplement his Initial Margin when the price approaches the Bankruptcy Price, and you can lose a lot more than your Initial Margin. So you would get a Profit/Loss Scenario like this for a Long:

Profit/Loss Scenarios for standard Futures that are NOT Limited Risk. BitMEX Futures are safer to trade than standard Futures as Loss is limited to Initial Margin.

The mechanics of the BitMEX solution are that BitMEX sets a so-called Liquidation Price a fraction above the Bankruptcy Price (in the case of Longs) or a fraction below the Bankruptcy Price (Shorts).

When the market moves adversely against your position and approaches the Bankruptcy Price, and breaches the Liquidation Price, the Liquidation Engine takes over your position and liquidates it automatically at market. It add any tiny profit made by the Exchange to the Insurance Fund, or deducts any loss made from the Fund.

Selecting Your Leverage

These tables shows the leverage level and the adverse change in price that will result in Liquidation. The greater the leverage the smaller the adverse change in price that will cause a Liquidation.

Long: Liquidation price < Entry Price

Short: Liquidation price > Entry Price

The above tables show that Shorting is safer than going Long, in that a larger percentage change (and USD change) is required to cause Liquidation when you go Short than when you go Long, for a given level of Leverage.

The above tables also show that even with the minimum 1x Leverage there is a small but real risk of Liquidation when Long. But there is no risk of Liquidation when 1x Short.

Use Maximum 25x Leverage

The BitMEX Exchange offers Long and Short leveraged trades of up to 100x Leverage. Never use more than 25x because the difference between the Liquidation and Bankruptcy Prices at high leverage stacks the statistical odds against a winning trade. Don’t worry about it at low leverage. This is explained in Why You Should Never Trade 100x at BitMEX: The Liquidation Price vs. Bankruptcy Price Gap Means you Lose

Example: you buy a $9,255 100x leveraged XBTUSD position with 1% margin, i.e. your stake is $93 of Initial Margin. Your Bankruptcy Price (Entry Price less 1% Margin) is $9,163 but your Liquidation price set by BitMEX is $9,240. The price just has to fall $15 (0.16%) from your Entry to trigger your Liquidation and 100% Loss. That is a trade for suckers. Trading with 100% leverage on a repeated basis (Long or Short) will inevitably result in losses. The BitMEX Insurance Fund wins. Its current holding is 6,909 BTC, or $65 million. That money came from salami-slicing the testicles of 100x bulls via the Liquidation Engine.

Or Create Synthetic High Leverage

But you still want to try high leverage, right? For reasons explained in this essay How to Create Synthetic High Leverage, if you want to trade with leverage > 10x then don’t do it with the Slider Bar. Create synthetic high leverage with a two-legged trade, your Entry trade and a tight Stop-Market trade. (Tight means close to your Entry Price.) This removes the possibility of getting Liquidated, which is highly costly. You might well get Stopped Out but this is less costly as you then make no charity payment to the Insurance Fund. Always avoid selecting high leverage from the BitMex Slider Bar. And always use a two-legged trade: you Entry trade and a Stop order.

Selecting Market vs. Limit: Use Limit Trades!

To use Market or Limit is one of your most important decisions.

It is not widely known that BitMEX charges extremely high fees to takers (those who use Market tab in the screenshot) but actually pays market-makers to trade (those who use the Limit tab). A marker-maker is defined as someone who places a Limit order and does not take the market price to open or close a trade. For all Bitcoin contracts:

Taker fee — 0.075% of total position

Maker fee — 0.025% of total position Rebate

BitMEX fees for market trades are 0.075% of your total leveraged position (not just your margin) for both entry & exit.

Example:

Calculate total fees on a $1,000 trade with 100x leverage. i.e you pay $1,000 Margin to open a $100,000 position.

Total Fees = 100 [leverage] x $1,000 [Margin] x 0.00075 [Rate for Market order] x 2 [Entry + Exit] = $150

Fees are 15% of your $1,000 trade in the example. Why pay 15% for market trading when BitMEX pays you 5% for trading with Limit Orders? (An additional benefit of Limit trading is that your trading is likely to be less frequent and more disciplined and profitable.)