9. Defending BitMEX Margin Call Forced Liquidation

 

Last time, we learned about margin calls~

 

This time, we will show you a scientific and practical way to prevent and defend against margin calls!

 

You can prevent forced liquidation by referring to the 5 useful methods below~

 

 

1. Investment weighting and leverage adjustment

 

Overweighting is the most efficient and scientific way to manage money. Overweight refers to the weight of each investment in cash and investment assets, or in multiple asset classes (stocks, bonds, gold, bitcoin).

 

Some of the popular methods of weight control are Shannon's Law, Kelly's Law, and Risk Parity. These are advanced money management techniques. If you want to know more in detail, please refer to Quant Investment's Money Management Techniques.

 

 

Next, I'll show you a simple example of weight control!

 

A has 1 million won.

 

If you use 10x leverage, you bet 10 million won.

 

If you gain 10%, you can earn +1 million won, and if you lose -10%, you will be forced to liquidate.

 

Many people are trading in this structure.

 

 

 

 

 

 

B also has 1 million won.

 

Only 100,000 won out of 1 million won is invested using 10x leverage.

 

Even if you are forced to liquidate, 10% of your funds will be liquidated.

 

If you make a 10% profit, you earn 100,000 won, and if you lose 10%, you lose only 100,000 won.

 

This is 10% of the total assets.

 

 

 

 

Who will survive in the long run, A or B?

 

The answer is B. The reason has to do with the concept of geometric mean.

 

The arithmetic mean is literally adding/subtracting the average.

 

Geometric mean is calculated by multiplying/dividing as an average value.

 

Let me show you an example of geometric mean~

 

 

 

 

 

10% profit on 10 million won = 11 million won

 

-10% loss from 11 million won = 9.9 million won

 

In the end, there was a loss of -10 million won.

 

20% profit on 10 million won = 12 million won

 

-20% loss from 12 million won = 9.6 million won

 

In the end, there was a loss of -40 million won.

 

30% profit on 10 million won = 13 million won

 

-30% loss from 13 million won = 9.1 million won

 

In the end, there was a loss of -900,000 won.

 

***Important here is that investments are geometrically averaged, so the lower the volatility, the less return you need to recover your principal after incurring a loss. Controlling volatility is really, really important.

 

 

Therefore, you can survive in the market in the long term by using leverage but thoroughly controlling the weighting, and if you can accumulate even a small profit and get compound interest, you can eventually make a lot of money. Of course, you need a solid strategy, right?

 

 

 

2. Stop Loss

 

In order to defend against margin calls, you should clearly set the principles before trading. You can avoid margin calls if you have a cut-loss principle when you achieve a certain loss.

 

However, depending on the strategy, there are strategies that work well when making a stop loss, and there are strategies that do not work well and only accumulate losses.

 

Even if you have a clear strategy, it's even better if you can backtest what you've done in the past with and without Stop Loss.

 

Limit stop loss order

 

 

 

 

3. Solid Strategy and Statistical Thinking

 

No matter how much weighting and money management techniques you use, if you don't have a solid strategy and statistical thinking, you will only lose money slowly in the long run, eventually filling up the can.

 

It takes a long time and requires a lot of study, but in order to raise money, you must have an edge over other market players.

 

A lot of training and research is needed to realize a statistical advantage. Coinpick has published a series of quant investment series, so it will be of great help if you study the material!

 

 

4. Use your limit

 

You can lower your transaction costs by using the limit price. The reason is that you can save on fees and enter positions at the price you specify. In this way, the gap between the entry price and the exit price can be wider than that of entering the market. This can reduce the probability of getting a margin call, even if it is small.

 

However, for the limit price, the order may not be executed, and the market price may be more advantageous depending on the strategy. It can be said universally that limit orders are a bit more suited to swing trading or long-term strategies, while short-term trades have a better market price.

 

 

5. Using safety devices

 

You can set an alarm by setting the gear icon in the upper right corner of the order window on the BitMEX exchange.

 

When you enter a position, the liquidation price is displayed. By setting an alarm between the liquidation price and the entry price, you can prevent margin calls by adding collateral or closing positions before receiving a margin call.

 

 

 

 

 

 

 

 

Here are 5 ways to do it!

 

Next time, we will talk about transaction fees, which are directly related to returns!

 

Click here for BitMEX fees!