Risk management оn BitMEX
BitMEX is known for a lot of things one of which is the excessively high leverage. BitMEX offers up to a 100x (hundred times) leverage. What that means is if I put $1,000 on a trade, I can leverage that up to a $100,000, meaning that if the price goes up by 1% I make a thousand but if the price goes down at all I get liquidated.
How does the leverage work?
Let’s say that we trade with $1,000 at the maximum possible leverage of 100x, amassing $100,000 worth of trading capital. Our margin, also known as 1,000 contracts, is equal to $1,000. This is because each and every BTC contract on BitMEX is worth $1.
This is because BitMEX uses perpetual contracts, which is a different kind of futures. Perpetual contracts never expire in contrast to other futures contracts that have a timestamp of the contract expiry date.
Because perpetual contracts never expire, the users should pay a relatively small funding fee every 8 hours in order for the platform to cover all possible risks it takes by essentially “lending” the remaining $99,000 we’re trading with.
Why leverage is OVERPOWERED.
So in another example, if we’re trading with $1,000 using 10x leverage, we’re having a position size of $10,000. This means the absolute maximum you can lose is only $1,000 and not $10,000, even though you’re allowed to trade with a lot more than you currently have.
Using the numbers above let’s run an “imaginary” trade with and without leverage:
Using no leverage: I have $1,000 that I bought Bitcoin with, the price of BTC went from $9,000 (my entry) to $9,100. I made 1.11% on top of my $1,000, which is $11
Using 10X leverage: I have $10,000 trading capital (my original $1,000 magnified by 10x thanks to the leverage I’m using). The price of BTC went from $9,000 (my entry) to $9,100. I made 1.11% on top of the $10,000 (my actual $1,000 magnified by leverage, or you could say I made 11,1% on my $1,000). The total profit is $111
Using 100x leverage: I have $100,000 in trading capital (the original $1,000 magnified x100). Same price increase from $9,000 to $9,100 will result in $1,111 profit (or 111,1% on top of my original $1000).
So a small 1% price movement can result in wild (100%) profits if leverage is utilized correctly.
What’s the potential loss?
That would be determined by the liquidation price, which varies based on how much you hold as a margin on the platform. Either way, the maximum (after series of bad trades) you can lose is your original $1,000, which simply cannot compare to the potential $1,100 profit on just 1% price movement.
This only applies in the isolated margin, however, because with cross margin the margin of your account is shared amongst all trades, meaning if you incorrectly place multiple orders they will eventually all get canceled if just 1 goes bad and liquidate your entire account.
BitMEX is a high-risk very high-reward platform and you have to be careful to not risk everything. It is tempting because it literally magnifies your potential profits but do keep your risk in check. If you cannot manage the risks you take then Futures Trading is not for you and you should definitely avoid this platform because it will liquidate you like that
On this platform just to make sure you are not taking too much risk, pay attention to the contract value, and always try to calculate really how large of a position you are taking by doing it this way.