In this blog, I will be describing how to calculate available margin equity and also will breaking down the basic understanding of what all the figures mean on your Kraken Overview page of your account.
Keep in mind that margin trading is very high risk / high reward stuff. Trading in a manner that maxes out all your margin at once as opposed to scaling in slowly, is even more high risk!
First off there are 2 ways to approach this. You can either have your equity sitting on the sidelines waiting for margin trades in the form of fiat (USD or Euros or whatever your currency of choice is). Or you can have your equity in cryptocurrency (BTC or XBT and ETH). However, the only equity that will be accounted for in a margin trade is the equity that is considered a collateral currency. Currently collateral currencies on Kraken are XBT (bitcoin on BTC), ETH(ether), USD, EUR, CAD, and JPY. So say you have .2 BTC or XBT, 1 LTC, and 100 USD in your account, and you want to place a long margin call on BTC or XBT. The equity of your LTC will not be accounted for because it is not a collateral currency. So the total available trade balance would be…
Total USD + XBT * Current BTC Price = Trade Balance
Your margin equity (which is calculated on the overview page) would then be…
Trade Balance + Unrealized Gains* = Margin Equity *This can be a negative #
Your margin equity and the leverage amount you choose is what determines how large of a position you can take. For example, say you have 1000 dollars in USD and want to make a 2x leverage trade going long on bitcoin that maxes out available margin. And lets assume the current price of bitcoin is 10,000 USD. How would u calculate your max amount of volume you can purchase on these conditions.
(Total Margin Equity) * Leverage / (Current Price of XBT) = Max Amount of Volume
1000 * 2 / 10000 = .2 XBT
The problem with getting the max amount is that bitcoin is always changing in real time. So if bitcoin goes up in price while you are making this calculation, you wont be able to margin as much as you initially thought. To avoid this problem you could just add about 1% to XBTs actual current price, which in this example would be $100. 99% of the time this will work because bitcoin wont be changing this rapidly in a 30 second time span.
1000 * 2 / 10100 ~ .198 XBT
In the similar scenario where your leverage is at the maximum of 5x, you would be able to buy .5 XBT or about .495 XBT if accounting for the 1 % potential change.
1000 * 5 / 10000 = .5 XBT
1000 * 5 / 10100 ~ .495 XBT
Now, say you actually don’t have any money in fiat and all your equity is in some form of cryptocurrency. The only amounts that matter with regards to margin trading is the combined current value of your XBT and ETH. If you have .2 XBT and 1 ETH, which value at 10k and 1k respectively, then your trade balance is…
Total XBT * Current BTC Price + Total ETH * Current ETH Price = Trade Balance
.2 * 10000 + 1 * 1000 = $3000
Because your trade balance is being calculated from cryptocurrencies now, it is no longer an unchanging number. Since ETH is more volatile than XBT, I would suggest using a 2% difference on the current XBT price to account for the volatility of your now changing Trade Balance when calculating your maximum amount of volume.
Trade Balance * Leverage / (BTC * 1.02) ~ Max Amount of Volume
3000 * 2 / (10000 * 1.02) ~ .588 XBT
If you have any questions, don’t hesitate to contact me. I will be posting a couple blogs addressing fees, liquidation, and stop loss / closing and settling positions soon.
Thomas Manning
CEO of Crypto Bay Holdings
Twitter: @CryptoBayHODL
Email: Thomas@cryptobayholdings.com
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