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Hi all,
I'm new to margin trading. I'd like to contrast my calculus to make sure I understand how it works.
Let's assume I have the following money: 1000€
Margin call level: 80%
Rolling fee calculus: 0.01%/4 hours * 24 hours/day * 30 days/month = 1.8% fee/month = 21.6% fee/year
If spend 3000€ using the 5:1 margin, 600€ of my account would be used to buy the position and the remaining 400€ will still be in €. If I buy at price of 600€/BTC, then I'd get 5BTC. So now I have 5BTC and 400€.
My concerns are about margin call level, because if bitcoin price falls and I don't add more money, the position will be automatically closed (liquidated).
To calculate the bitcoin's price at which the margin call level is reached, I've used the following formula, being X the percentage of bitcoin price drop:
(3000 * X) + 400 = 3000 * 0.8 -> X = 0.66
Then I multiply bitcoin's price when buying: 600 * 0.66 = 396€
Assuming after a month, the BTC price has moved to 395€ (or anywhere bellow 396€) the position will be closed automatically and I will lose all of my money, right? Furthermore, I should pay the rolling fee, which would be 600*1.8% = 10.8€. Is this fee also taken into account when calculating bitcoin's price at which the margin call level is reached?
I hope this also helps other users understand how margin trading works!
I'm new to margin trading. I'd like to contrast my calculus to make sure I understand how it works.
Let's assume I have the following money: 1000€
Margin call level: 80%
Rolling fee calculus: 0.01%/4 hours * 24 hours/day * 30 days/month = 1.8% fee/month = 21.6% fee/year
If spend 3000€ using the 5:1 margin, 600€ of my account would be used to buy the position and the remaining 400€ will still be in €. If I buy at price of 600€/BTC, then I'd get 5BTC. So now I have 5BTC and 400€.
My concerns are about margin call level, because if bitcoin price falls and I don't add more money, the position will be automatically closed (liquidated).
To calculate the bitcoin's price at which the margin call level is reached, I've used the following formula, being X the percentage of bitcoin price drop:
(3000 * X) + 400 = 3000 * 0.8 -> X = 0.66
Then I multiply bitcoin's price when buying: 600 * 0.66 = 396€
Assuming after a month, the BTC price has moved to 395€ (or anywhere bellow 396€) the position will be closed automatically and I will lose all of my money, right? Furthermore, I should pay the rolling fee, which would be 600*1.8% = 10.8€. Is this fee also taken into account when calculating bitcoin's price at which the margin call level is reached?
I hope this also helps other users understand how margin trading works!
You calculated the used margin correctly, but I'm not following the rest of it.
If you open a 3000 EUR long position at 5:1 leverage, the margin used to open the position will be 1/5 of the amount, so 600 EUR (as you say).
Margin level = equity ÷ used margin
When you first open the position, ignoring fees and changes in market price, your margin level would be 1000/600 = 167%
The margin call level is 80% - at this level we send you an email asking you to either close part of your position or add funds to your account in order increase your margin level. Position liquidation is possible at this level at our discretion, but it's not something we'd generally do except in very unusual circumstances. The liquidation level is 40%, which is the level at which positions are automatically liquidated (these % levels, BTW, can change and can be different for different pairs - you can check our fees page for the most up to date information on the margin and liquidation levels for any pair: https://www.kraken.com/help/fees.)
How much could your position lose before margin call (ignoring fees)?
(1000 - X)/600 = 80% ---> X = 520 EUR
How much of a drop in price would this correspond to?
3000*X = 520 ---> X = 17.3% (then if price was at 600 EUR when you opened the position, margin call would be at 496.2 EUR)
How much could your position lose before liquidation (ignoring fees)?
(1000 - X)/600 = 40% ---> X = 760 EUR
How much of a drop in price would this correspond to?
3000*X = 760 ---> X = 25.3% (then if price was at 600 EUR when you opened the position, liquidation would be at 448.2 EUR)
I've ignored trade fees and rollover fees above, but these do matter because they reduce your account equity.
If you haven't done so already, I highly recommend that you read our trading guide, especially the section on margin trading where all of this is explained:
https://support.kraken.com/hc/sections/200560633-Leverage-and-Margin
Hope this helps!
Thank you for your precise and quick answer! It helped me a lot and now the numbers make sense
. I had already read the trading guide but couldn't find any example.To be clear... All the charged fees are only applied to the margin (600€) used and not to the position (3000€), right?
Glad it helped - all the fees would apply to the full amount of the position (3000 EUR). A margin position is just a spot trade executed through an advance financed by Kraken, so you pay the trade fees on the spot trade and you pay the rollover fees on the advance, which is the full amount of the position. The 600 EUR is not what you are advanced but rather the amount set aside in your account as a kind of "collateral" for the position (so this amount would not be available for making more orders).
Thank you once again Dargo
