Margin Trading
What is margin trading and how does it work?
Margin trading (or trading on margin) helps to maximize their profit-earning potential. By trading on margin, a trader may select an order size that is larger than the amount they have in their account. In other words, it means that a trader wants to trade on a certain cryptocurrency market and the exchange they use lends them some extra cash. They add this extra amount to the existing one to enter bigger trade positions.
In the traditional financial markets, the funds for margin trading are usually lent by brokers. On cryptocurrency exchanges, the funds are typically lent either by other traders or by a platform that provides margin trading opportunities.
Please note that only the users who have verified Changelly PRO accounts may use the Margin Trading option.
The margin and the leverage
To place a margin trade, the trader will be asked to commit a percentage of the total order value. This amount is known as the margin. Another relevant concept in margin trading is leverage. It describes the correlation between the borrowed funds and the margin amount. For example, to place a $100,000 trade at a leverage of 10:1, a trader would need to invest $10,000 of their capital.
When it comes to cryptocurrency exchanges, the ratios are typically set between 2:1 and 100:1, and the trading community often uses the ‘x’ symbol to represent the leverage (2x, 5x, 10x, 50x, and so forth).
At Changelly PRO the highest leverage is 10x. For some exchange pairs, it is 5x.
Margin trading can be used for both long and short trades. While the margin trade is open, the trader’s assets act as collateral for the borrowed funds.
For instance, a long position with x10 leverage on the BTC/ETH market translates into an assumption that the BTC price will go up compared to the price of ETH. Each time the BTC price increases by 1%, the value of the position will increase by 10%. However, if the BTC price falls to such a level that the funds in the trader’s account can no longer cover the minimum required to keep the position open, it is then liquidated.
Example
A trader opens a long BTC-ETH margin position, when 1 BTC equals to, let’s say, 26.8 ETH. They set a margin amount of 1 BTC and the leverage of x10, the total position value, therefore, becomes 10 BTC. If the BTC price increases by 5%, and the trader closes the trade right after this moment, the profit will be around 13.4 ETH. Some percentage of the total profit will be paid as an Interest Rate. You can read about Interest Rates in this article.
However, if a trader opens a trade of another type, their profit will equal to 1.34 ETH only, since the total value of the trade was 10 times lower.
How to open a margin trade on Changelly PRO?
Before starting trading on margin, you’ll have to pass the KYC procedure.
- Make sure you have funds in your Trading account.
- Open the “Margin” tab and click the green “Margin” button in the upper right corner.
- Choose the market for margin trading in the next window.
- Enter the margin amount. Then click “Transfer”. The funds will be transferred from your Trading account.
- After the transfer is complete, you’ll be able to open a margin trade. You’ll see the leverage value in the upper right corner (the “Buying Power” block). You can add more funds to your margin at any time.
How to set a margin order?
The process is pretty much the same as placing a regular order. The amount you can place the order with is limited by your Buying Power, which is your margin amount multiplied by the leverage value. You can see your current Buying Power in the upper right corner on the “Margin” tab.
Before your first order is filled, you can cancel it without any charges.
The order types available for margin trading are the same as those for spot trading.
How to change a margin amount?
Just open the “Margin” tab and click the green “Margin” button in the upper right corner.
You can either add more funds to your margin or retrieve some assets from the margin. To do so, choose “Add margin” or “Retrieve margin” at the top of the window, select the desired amount and click “Transfer”.
Important: If you have an open margin trade, you can retrieve all the funds except for the minimum value required to keep the trade open.
About liquidation
Liquidation is a process when a position is forcibly closed when the asset price is reaching a certain limit.
When opening a leveraged trading position, its liquidation price is automatically determined. If the cryptocurrency price crosses this mark, the position is automatically liquidated.
The liquidation price depends on the order’s parameters, the leverage and the remaining balance in the trader’s account. There’s no need to calculate the price manually. Changelly PRO will provide you with the liquidation price, when you set the order’s parameters.
For liquidations, a Liquidation Fee in the amount of 0.5% of the position’s value is charged in the quote currency (i.e. ETH on the BTC/ETH pair).
To calculate the risk level of a margin account and the possibility of a position’s liquidation Changelly PRO uses a ratio called Effective Leverage. The value is calculated as follows:
Effective Leverage = (Index Price * Position Size)/(Position Margin + Unrealized PnL)
where the Index Price is the price at which you want to buy/sell the assets. The Position Size is the order amount in the base currency. The Position Margin is the collateral amount available for that order. The Unrealized PnL is the current PnL of the position that has not yet been realized.
Example
The Trading Pair is BTC/ETH
Index Price = 26.8 ETH
Position Size = 2 BTC (or 53.6 ETH)
Position Margin = 11.4 ETH
Unrealized PnL = 2 ETH
Effective Leverage = (26.8 * 2)/(11.4 + 2) = 4
Effective Leverage in use
10x Leverage pairs
- If the Effective Leverage is below 10, a trader can decrease or increase the Position Size and/or the Position Margin as they wish while the effective leverage remains below 10.
- If the Effective Leverage is equal to or greater than 10, then a trader can only decrease the Position Size and/or increase the Position Margin.
- If the Effective Leverage is equal to or greater than 12, a trader will receive a Margin Call. The call means that the position is highly leveraged and there’s a high risk of liquidation.
- Finally, if the Effective Leverage reaches 20, the position will be automatically liquidated.
5x Leverage pairs
- If the Effective Leverage is below 5, a trader can decrease or increase the Position Size and/or the Position Margin as they wish while the effective leverage remains below 5.
- If the Effective Leverage is equal to or greater than 5, then a trader can only decrease the Position Size and/or increase the Position Margin.
- If the Effective Leverage is equal to or greater than 7, a trader will receive a Margin Call. The call means that the position is highly leveraged and there’s a high risk of liquidation.
- Finally, if the Effective Leverage reaches 10, the position will be automatically liquidated.
Once the position reaches the liquidation price, the process is as follows:
- The system will cancel all of the open orders for a highly leveraged position.
- If after (1) above the Position Margin is still insufficient to reach the required minimum, the system will attempt to close the position with a single Limit Order with Time-In-Force instruction “Fill-Or-Kill.” If it succeeds, the trader may get a better price than the Bankruptcy Price.
- If after (2) above the position is still not liquidated, it will be sold at Bankruptcy Price.
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