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Leverage Trading

Common terms in leveraged trading

Introduction
In this section of the segment, we will focus on the common terms used in leverage trading and how to find them on the Bybit’s trading interface. It is crucial for traders to have a sound understanding of these terms as they will affect their trades one way or another. These are basically the important nuances involved in leveraged trading, having a poor understanding will leave the trader with a disadvantage. The leveraged terms listed below will be discussed over the next couple pages:
-Long/ Short Positions
-Isolated Margin
-Cross Margin
-Limit/ Market/ Conditional Orders
-Stop/ Take Profit Levels
-Liquidation Levels
Long/Short Positions
Long and Short positions are simply directional convictions between traders around the globe. After performing a routine market analysis on a specific asset, for example Bitcoin, a conclusion is made to either long the market and or short the market. A long position is simply the trader betting that the market will trade at a higher price from the current price point in time. They essentially put risk on with the goal of exiting at a profit once the asset appreciates. A short position on the other hand is the conviction that the market will trade at lower price point. This usually means that the market is showing weakness and that current levels are not sustainable. A trader will put risk on at a key price point with the aim of closing that position at a lower price for a profit. Both short and long positions can be executed at literally any price point, however, it is wise that traders execute such positions based of a trading plan. The above interface of Bybit shows the long and short buttons in the leveraged section. It is possible to open multiple long and short positions on the interface, however this would require trading multiple assets. The benefit of long and short positions is that trader can capitalise on both market directions. Long positions are naturally favourable in bullish trending environments whilst short positions are profitable in bearish trending environments.
Isolated Margin
The concept of isolated margin was discussed earlier, to put it in simple words, Isolated Margin is the specific margin assigned to a trader’s position. That is, it has a restrictive price point where additional margin cannot be added. When this price point is reach, the position is automatically liquidated. It again, is important to note, that traders can manually add to their position if price goes against them. These add-ons will influence the hard liquidation price. The more the trader add the lower the liquidation price gets, this also largely depends on the leverage ratio used. The above screenshot demonstrates how the isolated margin is enabled on the Bybit’s trading platform. A margin mode needs to be selected by the trader, in this case, it is the Isolated Margin. A brief description is presented to help novice traders understand the concept before confirming and activating it. The interface will also provide a leverage ratio toggle where trader’s can set their desired ratios.
Cross Margin
Cross Margin is another commonly used tool when it comes to leveraged trading. Again, putting it in simple words, Cross Margin uses all the available margin funds in a trader account to service their positions. This requires the user to have significantly more funds in their account to avoid liquidation levels. It is deemed a better mechanism to avoid losses, however, once they occur, they can be much larger then Isolated Margin. The interface above shows traders how to activate the cross-margin feature. Like the isolated margin, a well written description is made available to traders before activating the feature. Confirmation is then needed before traders can use the feature.
Limit Orders
Limit Orders in leverage trading are used to pinpoint entries without having to execute on market. It is considered an order that adds liquidity to the market because it sits waiting for other market participant to fill it, thus referred to as “market maker”. These types of orders are usually not automatically filled, they only get triggered once the market reaches the set limit price for that specific order. Limit orders are valuable in high liquid assets such as Bitcoin. The higher the liquidity the higher the probability of it being filled and vice versa. An important concept to understand here is that by placing these types of orders, traders add liquidity to the market, which is why they are referred to as making the market. The above Bybit interface shows how to place a limit order by selecting an order type. This will automatically prompt the trade to put in a price point with a quantity. This will go into the orderbooks and sit there until it is filled by another order at the same price point from anywhere around the globe.
Market Orders
Market orders on the other hand is more preferred by traders because of the instantaneous execution. They are great in timing entries and exits in a high volatile environment. Market orders however are more expensive than limit orders. When executing a market order, the trader is taking liquidity away from the market – “Market Taker”. Because these types of entries are filled instantly, they take liquidity out of the market as the order does not rest in the orderbooks. Market order’s do have a big importance in the movement of price. Think about it logically, if the market was only composed of Limit Order’s, the market would not move, it would be still. Market Order’s is what moves the market, filling in the resting Limit Order of other traders around the globe. The above interface highlights how market orders are executed when using the Bybit’s interface. The order type must be selected as ‘market’ before entering the position size. It is important to know the difference in the interface. A limit order in the interface has an order price whilst the market order does not have an order price.
Conditional Orders
These types of orders are deemed more complex but for good reasons. They are only executed when certain criterions are met. A conditional order can execute a market order and or even a limit order, this is depended on the trader. In this example, we will focus on a conditional market order. A conditional market order is simply an execution that gets triggered once a pre-set price point is met. The key here is the pre-set price-point, once price action trades towards that level, it guarantees a fill for that price point because of the nature of the market order. The same is true for a conditional limit order, however the fill may not be guaranteed. This is because a limit order takes its time to fill, as it provides liquidity to the market. the conditional order will stay active until it is either filled and or manually cancelled by the trader. In the above interface of Bybit, a conditional order is first set by determining the trigger price first. Once this is established, a trader can determine to either execute the trade as a limit order and or a market order. Then position size is then selected before the order is activated in the exchange.
Stop Loss and Take Profit Levels
Stop loss levels and take profit levels are usually determined before executing a trade, this is deemed good trading practise. A stop loss level is an invalidation point where a trader will be taken out of their position and realising the actual loss. This occurs because the trade plan has been invalidated, it is a form of risk management where losses are minimised. A take profit level on the other hand is where a trader realises the profit made from a specific trade. These levels are considered important to be determined to exit trades efficiently and effectively. Entries are important and exits are just as important, as trader’s need to avoid giving too much back to the market. The Bybit interface gives an option for traders to pre-set these levels prior to placing an order in the exchange. Here a take profit level can be manually entered alongside a stop loss level. Once they are determined, they will become part of the trade, it is then up to the market movements to trigger the orders.
Liquidation Levels
Liquidation levels as discussed earlier, are designed to settle positions once the specific price points are met. These levels will differ depending on the leverage ratios and the entry price of a specific asset. A rule of thumb is that the higher the leverage, the closer the liquidation price to entry. Traders using high leverage must be aware of the risks involved, especially if they use Cross Margin. Cross Margin as discussed earlier, uses the whole available margin to service positions. Isolated Margin on the other hand assigns a specific amount of margin to a specific position. Traders need to be aware of their liquidation levels prior to entering a trade, this can be calculated by using the leverage calculator on Bybit. The above screenshot example shows how to perform this. Firstly, the type of margin needs to be selected, in this case it is ‘Isolated Margin’. The amount of leverage, quantity and entry price is to be determined before a liquidation level is then calculated. In this example, the liquidation level turned out to be $36,529 on a 10x Leverage with an entry price of $40,000 at a position size of $10,000. Price needs to move again the trader by $3,471.00 before getting liquidated. Knowing this information before entering leveraged positions helps greatly with the management of the trade. Traders should know exactly where they are wrong on the trade before entering. They should also know exactly where to exit trades once they are in profit, but most importantly, they should know how to manage their trade around their liquidation level, this could mean adding more margin or simply realising the loss.