Launched in February 2019, the Xena Listed Perpetuals trading engine drew significant attention from the community. The plan for the release of the new derivative contracts has been consistent and includes the main cryptocurrencies and indexes, including the BTC volatility and mining complexity indexes. The synthetic contracts at Xena Exchange always mirror the price of the underlying assets and allow for up to 100x leverage, which is a major advantage for many traders. To jump into the boat, you need to prepare and learn about the rules and features of margin trading at Xena Exchange. That’s why we’re offering some margin trading guidance.
In our previous article, Discovering Xena Perpetuals: Key Features and Main Advantages, we covered the concept of margin trading and the way it protects traders from sudden liquidation on spikes. Today, let’s get down to more complex issues. But first, we need to define some terms.
Learning the terms and entering a leveraged position
To be able to trade Xena Listed Perpetuals, traders need to have a margin account opened. After the funds used as the margin have been deposited, the trader can start trading in the terminal. The functionality of the margin trading terminal and the spot trading terminal at Xena Exchange is basically the same: There are three main order types as well as some advanced orders, such as Trailing Stop Loss, Attempt Zero Loss, FOK, and IOC. If you’d like to learn more about the order types, here’s a great tutorial for you to look through.
In practical terms, the margins are designed to protect the financial security of traders by ensuring that the sides can meet your obligations. If you trade a Xena Listed Perpetual, you have a potential obligation to the market because the position may move against you.
Whenever you place an order and it gets executed, Xena Exchange calculates the margin necessary to ensure that you can meet your trading obligations until the next hourly clearing.
Margins are calculated as the product of the value of the position (order), the margin multipliers, and the margin rate, which can differ from contract to contract and may change over time depending on the total volume of positions and the number of orders opened on the account. The margin rates are determined in the contract specifications for each asset. In certain countries, there are regulations that make it obligatory to limit the effective leverage to certain numbers.
The Initial Margin is the amount of collateral required to open a position and thus is calculated for new orders. The Initial Margin equals zero for orders intended to close positions (including Stop Loss and Take Profit Orders).
The Free Margin is the difference between the user’s account balance and the sum of the initial margins of all active orders and positions on the account. If the trader’s order is accepted by Xena Exchange, the free margin of the account decreases by the margin of the order.
The Maintenance Margin is the amount of collateral required to keep a position opened. It protects traders from execution slippages during liquidation and significantly decreases the risks of one’s account balance becoming negative.
In addition to the initial margins required to open contracts, any adverse price movements on the market must be covered by further payments, known as variation margins. The variation margin is based on the hourly revaluation of a Xena Listed Perpetual position. In other words, the unrealized profit and loss, calculated for each of your Xena Listed Perpetual positions using the price of the respective underlying cryptocurrency or index, is settled to your account and can be used without any limitations.
The Margin Level is the ratio between the equity of the account and the total maintenance margin. If the margin level falls below the stop-out level, the account undergoes the liquidation process. A general rule of thumb is that if there is not enough collateral on your account to maintain your open positions, some of them might automatically be closed by Xena Exchange.
The important thing to remember about leveraged trading is that the margin requirements for all open positions are calculated on the account level and not on the position level, which enables margin netting.
Margin netting means that if you have two positions for the same instrument in different directions (longs and shorts), the margin will be taken only for positions of the side greater in volume. An example of how margin netting can be beneficial for the trader is the case when the trader has a large profit on one position and a huge loss on another. In this case, the trader’s position will not be liquidated, as the profit will cover the loss. The profit from the open position is settled to the trader’s account hourly, allowing him or her to use this profit to open new positions, or to reinvest, in other words.
Margin netting helps to reduce margin requirements and consequently your initial capital without increasing the risks.
Keeping an eye on the cash flows
Unlike other forms of derivatives (e.g., options and futures), cashflows such as carry costs are not reflected in the price of a Xena Listed Perpetual. Instead, the cash flows are paid while the position is open, allowing the Xena Listed Perpetual prices to track the underlying security rather than trade at a discount or a premium, as can be the case with other types of derivatives.
Xena Listed Perpetuals have two distinctive cash flows that impact the holders of an open position:
- Premium is used to push the price of a Xena Listed Perpetual to the price of its underlying asset. The premium is calculated and paid out at each hourly settlement.
- Risk Adjustment is the hourly cost charged by Xena Exchange for holding an open position in a Xena Listed Perpetual.
|Holders of long positions||Holders of short positions|
|Premium — if the price of the Perpetual
is higher than the prive of the underlying
|Premium — if the price of the Perpetual
is lower than the prive of the underlying
Both cash flows are calculated and settled at each hourly clearing.
Getting Started with a BTC to USD Perpetual
As the first derivative contract to be listed on Xena Exchange is the BTC to USD perpetual (XBTUSD), let’s take a closer look at its specifications. The BTC to USD perpetual is not new to the crypto market and is intended to mirror the price of BTC to USD. The initial and maintenance margin rates for the BTC to USD contract start from 5% and will decrease to 1% (hence, 100x leverage) when liquidity grows. Just like other contracts, this perpetual is cleared every hour. The .BTC3_TWAP index (the average price of Bitcoin from three exchanges — Kraken, Coinbase Pro, and Bitstamp — additionally averaged by time) is used as the benchmark.
The BTC to USD contract is traded in lots, with the lot size set at 100,000 contracts. The minimum order quantity is 0.01 lots (1,000 USD), which means you need to have at least 50 USD (at the very beginning, the leverage is x20, which increases as the liquidity grows) on your account to enter a position, and the maximum order is 5 lots (500,000 USDT). The margin rates for the BTC to USD perpetual are currently 5% for the orders with a volume less than 1 million USDT.
Let’s say John enters a long position
To gain a clearer understanding of how margin trading works, let’s take a closer look at John, who has 1 BTC on his account and can get exposure to 100 BTC.
Let’s say the current price of Bitcoin is 4,000. John anticipates the rise of the price of Bitcoin and places a market order to buy 0.5 lots of XBTUSDT (each lot is 100,000 contracts, and the value of each contract is 1 USDT). Xena Exchange calculates the initial margin for this order (0.5 lots * 100,000 contracts per lot / 4,000 USDT per BTC * 5% = 0.625 BTC). This amount is held on his account. The effective leverage of his position is 12.5.
After half an hour comes the time for the hourly clearing. The value of the .BTC3 index, which is used as the underlying index for the XBTUSDT contract, is 3,990. John has to pay a variation margin of 0.032 BTC (calculated as (1 / 3,990–1/ 4,000) * 0.5 lots * 100,000 contracts per lot), which is deducted from his account balance. The initial margin of the position is recalculated according to the clearing price.
During the next hour, the Perpetual is traded at 4,030 Bid and 4,031 Ask. John decides to close his position and sells all his contracts on the market, getting 0.124 BTC as gross profit (0.124 = (1 / 3,990–1 / 4,030) * 0.5 lots * 100,000 contracts per lot).
|Initial state||Place order —
buy 0.5 lots
|Hourly settlement||Close positoin —
sell 0.5 lots
|Account balance||1 BTC||1 BTC||0.996* BTC||0.961 BTC||1.081 BTC
of all margins)
|1 BTC||0.375 BTC||0.371 BTC||0.334 BTC|
|Initial margin||0.625 BTC||0.625 BTC||0.627 BTC||0|
|0.313 BTC||0.314 BTC||0|
* the numbers have been rounded for illustrative purposes.
If John had traded without leverage, his net profit would have been 0.008 BTC.
And now that you understand the principles of margin formation, you’re definitely ready to start trading on Xena Exchange. Click here to open your account right now!