What happens if you sell at a loss while leveraging?

The Crypto Dude

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Quote from: TankCoin on December 17, 2020, 12:00:17 PM

If the asset drops by 10% I'd get liquidated and lose the original $100, but what
happens if I see the price drop 2% and sell there

If the price drops 2% and you sell, you will have $980 in assets, but you still owe $900 to the exchange, after you repay the $900, you will have $(980-900) = $80 left.

Bitcoin_Arena

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฿itcoin for all, All for ฿itcoin.

Quote from: TankCoin on December 17, 2020, 07:06:57 PM

It does seem a bit scammy though when the leverage is 10x, which should mean liquidation at 10% (or maybe 9% if interest is taken into account, on a short term trade lasting under 1 day) yet the real liquidation price is at only -5%. An altcoin can drop 5% in no time, even BTC can.

It might seem scammy or unfair but that's the whole point of margin trading. A coin can as well increase by 5% in hours, you earn quick massive profits and won't even care how the borrowed amount helped you Grin

There are standard formulas used to calculate the liquidation price in case you are interested

Inverse Contract Long

Code:

Liquidation Value = Open Value – Maintenance Margin + Initial Margin

Liquidation Value = Open Value – Open Value x Maintenance Margin + (Open Value/Leverage)

Liquidation Price = (Contract Quantity x Contract Size)/Liquidation value

Inverse Contract Short

Code:

Liquidation Value = Open Value + Maintenance Margin – Initial Margin

Liquidation Value = Open Value + Open Value x Maintenance Margin – (Open Value/Leverage)

Liquidation Price = (Contract Quantity x Contract Size)/Liquidation value

Linear Contract Long

Code:

Liquidation Value = Open Value + Maintenance Margin – Initial Margin

Liquidation Value = Open Value + Open Value x Maintenance Margin – (Open Value/Leverage)

Liquidation Price = Liquidation Value/(Contract Quantity/Contract Size)

Linear Contract Short

Code:

Liquidation Value = Open Value – Maintenance Margin + Initial Margin

Liquidation Value = Open Value – Open Value x Maintenance Margin + (Open Value/Leverage)

Liquidation Price = Liquidation Value/(Contract Quantity/Contract Size)

More info: https://phemex.com/user-guides/liquidation-price

TankCoin

newbie

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It does seem a bit scammy though when the leverage is 10x, which should mean liquidation at 10% (or maybe 9% if interest is taken into account, on a short term trade lasting under 1 day) yet the real liquidation price is at only -5%. An altcoin can drop 5% in no time, even BTC can.

Bitcoin_Arena

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Activity: 2030

Merit: 1788

฿itcoin for all, All for ฿itcoin.

You will lose $20 of the $100 once you close your position at that point and will be left with only $80 in your account. But then have it in mind that there is a liquidation price too. Once the mark price hits the liquidation price, you will lose all the $100 in your account

In simple terms, with margin trading, you are lent money to trade with (also known as leverage) but there's a "price" to pay - the mark price of what you are trading in is not supposed to go past a certain price (Liquidation price) which is set as soon as you open your position or else you will lose all the $100 which you presented as collateral.

TankCoin

newbie

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Quote from: Tstar on December 17, 2020, 05:00:24 PM

"I am just worried about paying money back I haven't got and I'm such a n00b at this stuff!"

As you said, if it drops, your order will be liquidated a little earlier than the 10%. You don't need to worry about owning more money than you have.

Every exchange has different Terms of Service and Trading. Here are Bitmex examples and explanations:

https://www.bitmex.com/app/liquidation

https://www.bitmex.com/app/liquidationExamples

Cheers Tstar. Yeah I did notice when using 10x on Binance, my liquidation price was only at about 5% under my buy price, not 10% under.

Tstar

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"I am just worried about paying money back I haven't got and I'm such a n00b at this stuff!"

As you said, if it drops, your order will be liquidated a little earlier than the 10%. You don't need to worry about owning more money than you have.

Every exchange has different Terms of Service and Trading. Here are Bitmex examples and explanations:

https://www.bitmex.com/app/liquidation

https://www.bitmex.com/app/liquidationExamples

TankCoin

newbie

Activity: 6

Merit: 0

Let's say I have $100 and borrow at 10x to do leverage at 10x.

I can then trade with $1,000 but $900 of it was borrowed.

If the asset drops by 10% I'd get liquidated and lose the original $100, but what
happens if I see the price drop 2% and sell there?

Do I just lose $20 of the $100?

What happens with the loan and what's owed on it then?

The loss would be 2% of the $1,000 ($20) or put another way, 20% of my original $100, right?

Is this the whole purpose of being able to get liquidated at such a small loss - so whether you
lose 2% of the $1,000 or 20% of the $100, you are only ever losing a portion of your original
$100 no matter what happens?

I am just worried about paying money back I haven't got and I'm such a n00b at this stuff!

Topic: What happens if you sell at a loss while leveraging? (Read 114 times)