The first most important thing for investment is to be aware of risks and implement corresponding risk control. Amber is very common in futures leverage. So, how to control the risk of leverage in the first place? Let’s take a look.
The daily price increase and decrease of BTC, data source: yahoo finance, BTC-USD
This distribution is approximately centered at 1, and the standard deviation can be calculated as 0.038788. In other words, the standard deviation is approximately 3.9%.
What does this standard deviation mean, we can see the figure below. That is to say, the probability that the daily fluctuation rate falls within plus or minus one standard deviation is 34.1% *2. = 68.2%
In other words, the probability of a daily rise or fall of more than 3.9% is 31.8%.
So if you enter at a certain point, the probability of falling more than 3.9% the next day is close to 16%.
When opening a leverage of 20 times, the standard for forced liquidation of the platform will be set at about 4%. Then, if you calculate it, a contract with 20 times leverage will be liquidated every five to six times.
This is the reason why the platform likes players with 20 times leverage: as long as you play with me, no matter how much you can earn every time, as long as you fully leverage every time, your money will return to zero five or six times.
If you want your assets to be more secure, how should the leverage be set?
From the figure, if you want a smaller risk, it is best to set the leveraged liquidation risk beyond 3 times sigma. At this time, the probability of liquidation is less than 1%, and the relative liquidation line is down 11.7%, which corresponds to The leverage is 5-6 times.
One thing to note is that the percentage distribution of currency price rises and falls is not a true normal distribution, but a fat-tailed distribution, which means that the probability of a large decline is greater than the normal distribution.
Therefore, in order to better reduce risks, we must further reduce leverage. According to the above calculation, the leverage on BTC does not exceed 3 times, which is relatively less risky.
Other currencies can be similarly analyzed. For many small currencies, twice the leverage is extremely insecure.
Understand some common sense of probability theory, maybe you can live longer in this market.
In addition, this article is only X-Order’s observations and experience reflections on the market, and does not constitute any investment advice.
