[The difference between adding positions and adding margin]
Today, a friend mentioned a question:
After the contract is trapped, adding margin and adding positions can lower the liquidation price, so what is the difference between the two?
First, let’s talk about the conclusion:
Adding positions can lower the average cost, increase the position volume, and recover the cost faster and earn more when the price rises. An incidental performance is that the liquidation price will be lowered.
And the only function of adding margin is to lower the liquidation price and avoid or delay liquidation.
Then give an example to make a deduction:
For example, a certain coin is now worth 4 yuan. You spend 4 yuan to open 2 times more contracts, position by position, and hold 2 positions. The liquidation price is -50%, which is about 2.
After that, the market is not smooth and the price falls to 3. At this time, you have three choices:
Stop loss, add positions, and add margin.
There is no need to talk about stop loss. Let’s look at the difference between adding positions and adding margin in turn:
Adding positions:
Suppose you spend 3 yuan to add positions once when the price is 3. At this time, you have 4 positions and the average cost is 3.5.
That is, as long as the subsequent price rises to 3.5, you can get your money back, and what about the liquidation price?
According to the new cost price - 50%, it is about 1.75.
Add margin:
Suppose you add a margin of 3 yuan when the price is 3, then your position is still 2, and the average cost is still 4.
Then if you want to get your money back, the price still needs to rise to 4, and what about the liquidation price?
At this time, your leverage ratio = number of coins held x cost price/margin = 2x4/6=1.333
The decline required for liquidation = 1/1.3333=75%
The liquidation price = 4-4x75%=1
The liquidation price is about 1.
By comparison, it can be seen that the main function of adding positions is to increase positions, lower costs, and lower the liquidation price by the way, while the same funds used for margin can significantly lower the liquidation price.
The above is a simple example calculation, and the actual situation will be slightly different from the calculation.
In actual operations, my personal habit is to stop loss in time first, and secondly, I would rather blow up than add margin to wrong orders.
