Marginal trading is very different from traditional trading itself, but BitMEX adds even more differences. The article explains basics you should know before working with that exchange and bots for it.
All trading uses the XBT coin
It is the second abbreviation of Bitcoin. XBT and BTC have the same meaning.
Even there are USD pairs like XBTUSD and ETHUSD; the exchange provides only XBT wallet and balance. All profits, losses, holding are available just in XBT. There is neither way to transfer USD nor balance for it.
But how the USD trading is possible then? How to trade ETHUSD using XBT? The answer is in contracts. The BitMEX provides trading with contracts, not coins itself as on other exchanges. XBTUSD, ETHUSD, both are names of contracts. You buy or sell contracts, not coins.
The price of one XBT contract is always 1 USD. The value in XBT is dynamic and depends on the current price.
contract_price = 1 / orderbook_priceorderbook_price - the best price in the BitMEX order book
If BTC costs $4000, one contract is 0.00025 XBT.
contract_price = 1 / 4000 = 0.00025
ETH contracts use XBT too, even with it is pairing with USD. It has a different formula, but the point is the same, you're trading contracts and not the ETH itself.
Margin trading is trading with a loan
It allows trading with more funds than available. With 0.01 XBT on balance, you can open a position up to 1 XBT. Such trading requires some way to secure the loan, called a margin here.
The margin is how much funds the exchange locks on your balances to open the position.
BitMEX allows trading with up to 100x more than you have. Ability to trade with 100 times more funds looks attractive, especially regarding profits, but it has its drawbacks. It is a bad thing when the price goes against your trade. In margin trading, things are even worse. Imagine that you've opened a position for 1 XBT using 0.01 XBT as the margin. Now the price dropped by 50%, and the position costs now no more than 0.5 XBT. How to cover 0.5 XBT loss with only 0.01 XBT? Are you in debt with exchange now? A liquidation doesn't allow this, and the position liquidates before you are in debt.
Liquidation, when you might lose the whole deposit
All exchanges with margin trading have it — the liquidation guarantees that no one goes in debt.
It ensures that the position loss is less than margin. Whenever the loss increases and almost matches the position's margin, liquidation comes. If it is a long deal, the system sells your contracts at the market rate. If it is a short deal, then it buys. If you have a long deal for 1 XBT using 0.01 as its margin, the exchange liquidates it as soon as the loss is near 0.01. It's only 1%, that's why it is a bad idea to use high leverage.
After a liquidation event, all position margin is lost. If you had the whole deposit in the liquidated position, then you lost it. It is the biggest difference from tradition trading as you can't hold a negative deal for years with the hope it goes back. The exchange liquidates it much faster.
A chance to lose all funds with only 1% price negative move doesn't sound well. So you should control risks with leverage.
Higher leverage leads to higher risks
Many BitMEX trades have the same opinion that using leverages more than 10 is a bad idea. Even 10x comes with high risks. It doesn't mean that there is no way to trade successfully with leverages more than 10, but one wrong trade can lead to a full loss of the trading deposit.
Just don't forget that high leverage comes not with only high profits, but high losses too. And the faster the loss increases, the faster liquidation comes.
For example, if you open a position for 0.2 XBT with 0.1 XBT as the margin, so that the leverage is 2, the position might withstand a loss up to 50%. But if you change leverage to 10, and opens a position for 1 XBT with the same margin of 0.1 XBT, the maximum possible loss changes to 10%.
Liquidation uses a price index, not the price itself
The BitMEX exchange liquidates positions when price index mark drops to liquidation price.
The price index is not the same as the current price. It is an average from prices on multiple exchanges. You can check more here.
The main point of using the index to prevent unnecessary liquidations in case of technical problems or manipulation on BitMEX itself. If the price drops for 20% only on BitMEX, it doesn't lead to any liquidations.
There is only one balance on BitMEX - Bitcoin, XBT;
You're trading contracts, not coins itself;
Margin - something like insurance to secure your position. It is a maximum possible loss for a position.
Liquidation prevents going into debt with a negative balance.
As soon as a position loss too near to its margin, the exchange closes the position on a market rate;
Liquidation uses a price index, not the price itself;
The price index is an average price for other exchanges;
Leverage gives control over risks;
Higher leverage leads to higher risks, don't use leverages higher than 10 at all. If you are new, use leverages like 2-3.