Margin trading is when investors use borrowed assets as principal to trade crypto assets. Users need to pay a portion of owned assets as collateral, which is called “margin”.
Margin trading allows users to gain access to more trading assets and opportunities, and P&L is subjected to total position held by the investors. WhaleFin Margin provides investors more opportunities to capitalize on market volatilities.
2. What is a margin?
Users need to pay a portion of their assets as collateral before borrowing new assets. Margin refers to the collateral of all open position(s), which is supported by the total assets of an account.
At WhaleFin, all crypto assets eligible for margin trading will become margin, which will be calculated in USD.
Since the market liquidity of different crypto assets may vary, for the sake of risk control, different margin discount rates will apply to different assets. Usually, major currencies with better liquidity have higher discount rates.
e.g. The investor has 1 BTC and 100,000 USD in the account, and the current market price of BTC is 50,000 USD. Under this circumstance, the investor’s total margin will be:
Total margin = 1 BTC * 50,000 * BTC margin discount rate + 100,000 * USD margin discount rate
3. What is Trading Leverage?
Borrowed assets are the core for margin trading. We use leverage level to calculate the maximum tradable asset, level x indicates the user can use x times of owned assets for margin trading.
e.g. The investor has $10,000 worth of margin and would like to borrow $40,000 for margin trading.
So the total tradable asset = $10,000 + $40,000 = $50,000
The leverage level will be at $50,000 / $10,000 = 5x, meaning that the maximum tradable asset for the user is $10,000 * 5x = $50,000
4. Long Position & Short Position
Long position means buying in now and expecting to sell out at a high price in the future.
Short position means selling out now and expecting to buy in again at a low price in the future.
Spot traders can only wait when they expect the price to fall, while margin traders can sell high & buy low.
5. What is a Position Level?
Margin trading uses borrowed assets, and the term “position” is introduced to record the user’s borrowing history. When an investor buys in, it is called “long”; when the investor sells out, it is called “short”. For example, when the user buys 2 BTC/USDT, the user is long 2 BTC/USDT.
6. What are Open, Add, Reduce, and Close Positions?
Open position: place and fill a buying or selling order starting from 0 position. A filled buying order is called “open long position”, a filled selling order is called “open short position”.
Add position: trading in the same direction of the current position to make it larger
Reduce position: trading in the opposite direction of the current position to make it smaller
Close position: reduce current position to 0
A. When the user has a long position, buying in means adding positions, selling out means reducing positions.
B. When the user has a short position, buying in means reducing positions, selling out means adding positions.
C. When the user longs at N positions, selling N is called closing a long position, or close position.
D. When the user shorts at N positions, buying N is called closing a short position, or close position.
7. What is Forced Liquidation?
Margin trading can magnify both profit and loss of the investors.
When the user’s margin cannot cover the P&L of the account, forced liquidation will be triggered. Due to the market volatility, forced liquidation will come before all margins are lost. Therefore, we introduce “maintenance margin” to calculate the minimum amount of margin so as to keep your positions safe. If your margin<maintenance margin, forced liquidation will be triggered.
8. Unrealized and Realized P&L
Unrealized P&L: due to market volatilities, the average purchase price of the investor is different from the real-time price. We introduce “unrealized P&L” to calculate estimated profits and losses brought by changing real-time prices.
Realized P&L: when investors reduce or close positions, the purchase price and the strike price are both set, therefore the profits and losses are also set, which are called “realized P&L”.
9. What is Settlement?
Settlement is the agreed delivery of assets according to the contract. The contract price is called the average price of the position, which is not directly linked to the real-time price.
At a long position (buy in), settlement means adding positions at the average price;
At a short position (sell out), settlement means reducing positions at the average price.
e.g. The investor has a long position of 1 BTC and the average price is $10,000, while the real-time price for BTC is $20,000:
Settlement: the investor will get 1 BTC at the expense of $10,000, the profit will be 1 BTC * $20,000 - $10,000 = $10,000;
Close position: Investor will sell 1 BTC at $20,000, the profit will be ($20,000 - $10,000) * 1 = $10,000
When slippage is not taken into account, settlement and close bring the same profits and losses. The difference is that settlement focuses on getting assets, while close focuses on calculating the difference of prices.
10、Cross Margin & Isolated Margin
Cross margin: all assets available for leverage settlement will be counted as margin, plus all unrealized P&L for different positions. With appropriate margin level, the total risk will be more controllable for the user. However, if forced liquidation is triggered, investors may lose all of their assets in the account.
Isolated margin: margins are calculated respectively for each open position. The P&L of one position will not affect other positions. The maximum loss is the initial margin used when the position opens.
WhaleFin applies cross margin mode for margin trading.
11. Take-profit & Stop-loss Orders (Stop Order)
Your positions will be automatically closed when the level of profit and loss you set is reached.
(1) Stop orders by unrealized P&L
WhaleFin provides portfolio take-profit and stop-loss services to offer investors better risk control options for their accounts, meaning that P&L of all positions will be taken into account.
(2) Stop orders by isolated position price
WhaleFin also provides take-profit and stop-loss services for single positions. Users can set the stop price to determine when to automatically close the positions.
If the user has a long position and sets a limit price higher than the current price, then it is a take-profit order; otherwise, it is a stop-loss order.
If the user has a short position and sets a limit price lower than the current price, then it is a take-profit order; otherwise, it is a stop-loss order.
Liquidation is the process of calculating and covering all debts after all orders are completed to avoid uncollectibles.
13. What is a “Reduce Only” order?
When enabled, positions will only be reduced. Orders of this type may be automatically reduced or even canceled to ensure no positions are added. When a “reduce only” order is triggered, existing orders with the same position directions with the “reduce only” order will be canceled; for orders with the opposite position directions, the maximum filled amount will be equaled to the current position, and the rest will be canceled.