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Author Topic: Why not leave bitcoinia in maximum leverage?  (Read 2724 times)
arabianights
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March 20, 2012, 03:44:35 PM
 #1

Is there any reason not to leave it in 5:1/10:1 leverage, assuming your account balance will support it, and just exercise self discipline? Seems to offer max flexibility and no downside.

Or will your borrowing costs be increased? I haven't checked.
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SkRRJyTC
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March 20, 2012, 03:47:31 PM
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Is there any reason not to leave it in 5:1/10:1 leverage, assuming your account balance will support it, and just exercise self discipline? Seems to offer max flexibility and no downside.

Or will your borrowing costs be increased? I haven't checked.

The best reason I have come up with for myself is that I am not able to limit my loss to an acceptably small % when using 10:1.  I was either taking a very healthy profit (profit is great when you can get it at 10:1), but all my losing positions lost too much too quickly and I end up getting forced out.
arabianights
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March 20, 2012, 03:50:11 PM
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I am not advocating trading 10:1 leverage... with that spread you would immediately die.

But why not trade 2:1 leverage with the account left in 10:1?

We need a proper exchange where you can earn the spread.
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March 20, 2012, 03:52:54 PM
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I am not advocating trading 10:1 leverage... with that spread you would immediately die.

But why not trade 2:1 leverage with the account left in 10:1?

We need a proper exchange where you can earn the spread.

Its very possible I dont understand...

Would trading 2:1 leverage with the account left in 10:1 act differently than trading 2:1 with the account at 2:1?
arabianights
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March 20, 2012, 03:53:37 PM
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That's pretty much the question I'm asking in this thread!
SkRRJyTC
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March 20, 2012, 03:58:37 PM
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That's pretty much the question I'm asking in this thread!

Do you know how a traditional brokerage account would act in regards to that leverage question?
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March 20, 2012, 04:08:58 PM
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There is no difference in your costs.  It's just a matter of discipline.  Do you want to be responsible for keeping yourself in line, or would you rather the site enforce it for you?

https://www.bitcoin.org/bitcoin.pdf
While no idea is perfect, some ideas are useful.
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stevegee58
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March 20, 2012, 04:13:51 PM
 #8

It really doesn't matter.  Leverage only affects how much of your margin is used when you open a position.

Position sizing is most important.  Your max loss on each trade needs to be known up front, say 1% of NAV.  You stop loss is set based on whatever technicals you use.  The position size is set according to what your max loss would be if the stop loss were hit.

Leverage has no effect on the position sizing I described.  It only affects how many positions you can put on at the same time.

You are in a maze of twisty little passages, all alike.
arabianights
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March 20, 2012, 06:12:45 PM
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That's pretty much the question I'm asking in this thread!

Do you know how a traditional brokerage account would act in regards to that leverage question?

I've never heard of adjustable leverage with one
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March 20, 2012, 06:26:59 PM
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I've never heard of adjustable leverage with one

Oanda lets you set your leverage, though obviously you can't trade BTC there.

You are in a maze of twisty little passages, all alike.
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March 20, 2012, 08:00:50 PM
 #11

Yup, one can do that, the effect is the same.

It is more 'dangerous' to miss-click though. And if you get carried away it can be devastating.

First they ignore you, then they laugh at you, then they keep laughing, then they start choking on their laughter, and then they go and catch their breath. Then they start laughing even more.
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March 20, 2012, 09:48:58 PM
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Because of liquidity and volatility issues, even forced margin call trading might not happen fast enough for some accounts.  It is then possible to lose more than you have in your account.  As a result you would then have a negative balance and owe Bitcoinica money   

Having 10X leverage means you can end up owing a lot more than you ever wanted to.

Now what ends up happening is some traders will go negative and just open a new account.  That's a problem for Bitcoinica, as I've seen mentioned before, so it may end up that identity (and maybe a credit check even) will be necessary for highly leveraged (5X) accounts or eventually for all accounts even someday.

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March 20, 2012, 10:21:55 PM
 #13

Because of liquidity and volatility issues, even forced margin call trading might not happen fast enough for some accounts.  It is then possible to lose more than you have in your account.  As a result you would then have a negative balance and owe Bitcoinica money   

Having 10X leverage means you can end up owing a lot more than you ever wanted to.

Now what ends up happening is some traders will go negative and just open a new account.  That's a problem for Bitcoinica, as I've seen mentioned before, so it may end up that identity (and maybe a credit check even) will be necessary for highly leveraged (5X) accounts or eventually for all accounts even someday.

When this sort of negative balance situation happens, it is the traders fault or the service providers fault?  Should the trader really be liable for more than their deposit?
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March 20, 2012, 10:50:33 PM
 #14

Because of liquidity and volatility issues, even forced margin call trading might not happen fast enough for some accounts.  It is then possible to lose more than you have in your account.  As a result you would then have a negative balance and owe Bitcoinica money   

Having 10X leverage means you can end up owing a lot more than you ever wanted to.

Now what ends up happening is some traders will go negative and just open a new account.  That's a problem for Bitcoinica, as I've seen mentioned before, so it may end up that identity (and maybe a credit check even) will be necessary for highly leveraged (5X) accounts or eventually for all accounts even someday.

When this sort of negative balance situation happens, it is the traders fault or the service providers fault?  Should the trader really be liable for more than their deposit?

Customers are liable for negative balances in the case of stock and futures brokers. Any margin trading policy should include a statement that the trader is liable for more than the deposit.

It's not the service provider's fault because sometimes the liquidity is not enough to support forced liquidations, especially when the overnight/weekend gap occurs. (The price can jump up or down a few percent without any trading volume in between.)

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alan2here
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March 21, 2012, 12:31:41 AM
 #15

Thankfully this isn't how BTC trading works, overshoot 0 and presumably Bitcoinica suffers a loss and you cirtainly don't suffer any debt. This as I see it is a good way to do things, what if debt became illegal in the future, maybe we are looking at the far future here, but BTC seems to be a good step forward.
SkRRJyTC
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March 21, 2012, 01:36:47 AM
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Thankfully this isn't how BTC trading works, overshoot 0 and presumably Bitcoinica suffers a loss and you cirtainly don't suffer any debt. This as I see it is a good way to do things, what if debt became illegal in the future, maybe we are looking at the far future here, but BTC seems to be a good step forward.

I lean this way
Stephen Gornick
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March 21, 2012, 01:42:37 AM
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Thankfully this isn't how BTC trading works, overshoot 0 and presumably Bitcoinica suffers a loss and you cirtainly don't suffer any debt. This as I see it is a good way to do things, what if debt became illegal in the future, maybe we are looking at the far future here, but BTC seems to be a good step forward.

Ok, that's way off topic and is a bizarre mindset to me probably a controversial topic, better suited for the economics forum or something to that effect.

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March 21, 2012, 02:31:51 AM
 #18

Thankfully this isn't how BTC trading works, overshoot 0 and presumably Bitcoinica suffers a loss and you cirtainly don't suffer any debt. This as I see it is a good way to do things, what if debt became illegal in the future, maybe we are looking at the far future here, but BTC seems to be a good step forward.


"In Sanskrit, Hebrew, Aramaic, ‘debt,’ ‘guilt,’ and ‘sin’ are actually the same word."

http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html

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March 21, 2012, 05:04:21 AM
 #19

Here is a situation in which you would want to choose your leverage:



1) With 10:1 leverage, your account can short or long up to 100 BTC. (For the sake of simplicity, let's say this stays true throughout this example).
2) You have a long position of 50 BTC.
3) You think that having a long position of 100 BTC is too risky, but a long position of 50 BTC is good.
4) You set an ask order for 50 BTC, but don't set any bid orders (too risky).

Now here is where setting the leverage comes in.

5) You set your leverage to 5:1.  The maximum you can short/long is now 50BTC.
6) In addition to setting the ask order for 50 BTC, you also set a bid order for 50 BTC.



-If the market goes down then up, your bid order is canceled (not enough leverage), then your ask order is executed.  This is is the same as steps 1-4.
-If the market goes up then down, you made money without taking unacceptable risks!



Being able to set your leverage has limited use since it is global for all trades.  If you could set it for each trade it would be a lot more useful.
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March 21, 2012, 07:04:30 PM
 #20

After the past week's activity, this is what I did.

Because bitcoin seems to be inherently very high risk, I'm not as concerned with risk exposure as much as I might be in another market. I have a more "all in" kind of attitude about it. The volatility during moments of illiquidity is enough, IMO, to change the typical risk:reward ratio that I might use. I might see a few second or few minute spike that would typically cause me to close a position (or see it stopped out) - If I used a standard R:R ratio, I'd be losing money far too often, which actually changes that ratio dramatically (once I add in probabilities of liquidity spikes). Finally, with spreads upwards of $0.20, you're going to have to be able to take a serious bounce to make any money.

In the end, I cranked up the margin so I could sleep knowing I wouldn't be stopped out only to see the price move back in my favor by the end of the day. I like seeing it green and mostly unused, and at 2.5:1 it was starting to look rather like too much very-short-term risk.    Smiley

I think this is even more important to consider if your account is funded with BTC rather than USD. I'm sure this is a major cause of forced liquidations.


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