Thread by @AureliusBTC

The average leverage used on Bitmex is 8.6x. In sideways chop price action, people are still constantly getting liquidated on tiny moves.

Might be a good time, especially in this market environment, for a thread about leverage and how to *properly* use it.

What is leverage?

It's using borrowed funds, typically from your broker, to open a position larger than one could with just the funds on the exchange. This increases both your reward, but also your risk.

Bitmex offers up to 100x leverage (on the default risk limit), and by using leverage, you encounter the concept of liquidations.

The higher the leverage used, the smaller the initial margin required, however, the closer your liquidation point is due to that.

The liquidation point is the price at which the exchange forcibly closes your position, and is determined by what amount of leverage you use.

For example, using 25x leverage, your position will be liquidated if price moves against you ~4%, if using 5x leverage, price must move ~20% against you, etc.

This is all relatively easy to calculate using the Bitmex PnL & liquidation calculator, and shouldn't need much explanation

However -- everyone sees people bragging about using high leverage as well as people getting liquidated after ridiculously tiny moves.

This is because most retail traders see leverage as a 'get rich quick' tool by increasing risk.

Leverage should NOT be used for increasing your risk per position. It should be used to allow you to:

1) Reduce counterparty risk (risk of storing funds on exchange)
2) Allow you to deploy more capital in various trades, thus increasing capital efficiency.

What people don't realize is that the amount of leverage used doesn't matter that much.

By asking 'I wonder if opening a 2x long here is safe', you're asking entirely the wrong question.

The same applies for people who thinks they're gods for always using 25x+ -- It's not about the leverage, it's entirely about the amount of your portfolio you risk.

If you're the average trader, your position should never be liquidated. There is almost no situation in which you shouldn't have a stop.

(There is an exception to this rule -- If the position size is large enough, it makes sense to use high leverage to avoid stop market fees + slippage, as the trading engine handles closing out your position, but also takes the position's margin.)

So, if the amount of leverage used isn't important, what is? Your risk level.

Calculate it using this: (Position Size)/(Portfolio Size) * (Stop Distance)

Example: $2,000/$1,000 * 0.01% = 0.02%

If this result is above the % you risk per trade, you are doing something WRONG.

If you only have 10% of your portfolio on Bitmex, it's perfectly fine to consistently use 10x leverage with a stop a few percent away.

In fact, it's smarter to do this because you reduce your counterparty risk.

Disclaimer: Just because I've said the amount of leverage doesn't matter does not mean you should be insanely high leverage.

You should be using just enough leverage that matches your risk limit and stop placement, based on how much of your portfolio is in Mex.

There are two types of leverage available on Bitmex:

The first and simpler version is called Isolated Leverage.

Isolated leverage is when you use a preset amount of leverage (1x-100x), and that determines how much margin is required.

If the position gets liquidated, you only lose the margin initially set.

For example: a 100k position size (Worth 15.9 BTC) position at 10x leverage costs ~1.6 BTC of margin to open. Thus, if your 10x position got liquidated, you would only lose the 1.6BTC.

Isolated margin is what most new traders should use -- It's most useful for people who are only trading on 1 instrument and want something simple -- Or for such large positions that it makes sense to use higher leverage and use the liquidation price as a stop (due to slippage).

The other, more complex, type of leverage is called cross leverage.

Cross uses your entire account balance as margin for positions, so if you get liquidated on cross, your entire account is wiped.

For more advanced traders who have a majority of their portfolio on Bitmex and plan to trade multiple instruments, I'd encourage you to use cross.

However, the learning curve is a bit steep, so try it out on testnet or on small positions to start.

If you plan to use crossmargin, you must *always* have a stop on. Your liquidation cannot be your stop.

Your leverage on cross is determined based on the position size divided by the account balance, which then determines your liquidation price. It should, typically, be low.

Due to the way crossmargin sets margin, it'll show the ROE on a position as if it was at 100x leverage.

The ROE screenshot is irrelevant and means almost nothing. All it shows is what percentage move the position has been kept open for (E.g 100% roe on 100x = 1% move caught).

It doesn't mean they grew their account 1000s of percent...like some Twitter accounts want to show..

For both types of leverage -- the underlying point still remains:

It's not about how much leverage you use on a specific position.

It's about how much you risk compared to your portfolio.

Example:

Someone's portfolio is worth $1M.

If they take a 20x leverage long w/ $50k of margin, meaning the position size is $1M, this is perfectly fine if they have a stop about 2% away.

Even though the *leverage* is 20x, they still only risk 2% of their portfolio.

Example #2:

Someone's portfolio is worth $1M.

If they take a 5x leverage long w/ $1M margin, meaning the position size is $5M, and they have a stop 2% away, this is terrible risk management.

They're risking 10% of their portfolio, even though they're at a lower leverage.

This is why the leverage amount doesn't matter.

It's entirely above the amount risked of your *entire* trading portfolio determined by your position size & stop.

Summary:

- The amount you risk per trade is all that matters.
- The amount of leverage itself is irrelevant.
- Leverage is a risk management tool, not a gambling tool.
- Don't overleverage your portfolio across multiple positions too aggressively.

Answers to frequent Qs from new traders:

1) Increasing your leverage does not increase your profits. You must increase your position size.

2) Set your stop based on the position size, not based on the leverage used. Leverage only changes the margin needed for a position.

Good video on risk management generally: & Medium post on stop placement both by @CryptoCred: medium.com/@cryptocreddy/…