This article will explain a little bit about margin trading on poloniex. I know lots of people new to cryptocurrency trading doesn’t have any idea on how to do margin trading. It took me weeks to understand how it works, but once I understand it, I feel that if done correctly, margin trading is a really good way to maximize your profit (although it can also be very dangerous, so remember to trade with caution).
The basic of Margin Trading on poloniex
The ideas of margin trading on poloniex is to “borrow” bitcoin or alternate currency, and use it for your trading to make even more profit (or loss!!). Currently, poloniex will let you borrow 2,5 times your initial amount on your margin account (We call this leverage). So in order to do margin trading on poloniex, you will first need balance as way to guarantee in case you defaulted.
For example :
You have 150 BTC on your margin account (see how to transfer coin to poloniex margin account), using margin trading, you can trade 2,5 times your balance, so in this case you can trade 375 BTC.
Where is the coin coming from? This will be taken from “Lending” balance, please note that when you lend coin from lending account, the interest rate may vary from 0.01% to 2% DAILY, yup you read that right, up to 2% daily interest rate. So you don’t want to lend for a long period of time unless you sure your profit will be greater than your interest fee.
Remember that you can lend up to 2.5 times your initial balance , that is about 150%. So in order to protect the lender’s money in case you loss/defaulted, there is something what they called “Maintenance Margin”. Maintenance margin is 20% of the total of your initial balance plus lending balance.
So if you have 150 BTC in your margin account, and your Maintenance Margin is 20%. Borrowing 300 BTC, you open a long position in the ETH market. Now, in order to avoid a forced liquidation, the Net Value of your margin account must remain above 20% of the 300 BTC you just borrowed, or 60 BTC. If the price of ETH starts declining, the amount of BTC you can get by selling the ETH you just purchased diminishes, and you start to incur a loss. This is reflected in your P/L and Net Value. If the amount of this loss, together with the lending fees you owe, reaches 90 BTC, the net value of your margin account will be 60 BTC (150 BTC minus 90 BTC in unrealized losses) and a forced liquidation will be triggered.
According to poloniex, this is what happen when forced liquidation triggered:
“…A forced liquidation is when all or part of your positions are closed automatically to prevent further loss and ensure you do not default on your loans. Forced liquidations are executed using one or more market orders; as such, order book liquidity at the time of these orders will affect the extent of the losses you incur from the liquidation. Forced liquidations occur when your Current Margin dips below your Maintenance Margin. It is strongly advised that you check the markets and your open positions regularly, mitigating your risk as necessary by reducing the size of your positions or transferring additional collateral into your margin account. Markets can change very quickly, and no guarantee can be made that you will receive a Margin Call warning in time for you to prevent a forced liquidation….”
So now you already know the basic of margin trading, you may want to trade with caution, because margin trading is like a double edged sword. You can make huge profit with its leverage, but you can also lose all of your money when the market is against your favor.
More on poloniex.com margin trading
For complete explanation on margin trading on poloniex, you can watch this excellent video from youtube user lumbridgecity.
Happy margin trading!