Crypto Trading Nuances: How to Optimise Your Margin

What Role Does Margin Play?

When it comes to derivatives, margin is the collateral required for opening a position. But margin can be much more than that. It can define the balance between capital efficiency and safety. We’ll demonstrate this with a contrived example.

How To Calculate the Optimal Margin

In most cases, your position will have some risk of getting liquidated. If that probability is too high for comfort, then your margin is too low. For now, let’s assume that we want to have a very low chance of getting liquidated. This condition allows us to calculate a specific margin boundary in three steps:

  1. Decide on your strategy’s absolute maximum position. Your liquidation point is effectively when your position’s unrealised loss has matched your remaining margin, and the maximum position helps determine what you could lose. Note that the liquidation point described here is simplistic, as there are more considerations like maintenance margin.
  2. Find the largest probable price percentage change you could experience. To be as safe as possible, we would take our assumed longest holding time as our worst-case scenario. For example, say we would not be in our max position longer than one hour. We can then look at all the one-hour periods in the past and determine the maximum price movement that can occur.
  3. Calculate your max potential loss. We can calculate this by calculating the unrealised P&L using the max position and the largest probable price % change above. Calculating P&L varies for each type of product, but each exchange will usually show you how to calculate the P&L for their offerings.

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