# Leverage Strategy in Bear Market {% hint style="danger" %} Margin trading is planned to be introduced in 4Q 2023. The strategies outlined in this guide are based on specific market conditions for ease of explanation. It is crucial to remember that risk management is of paramount importance, as real market conditions can vary significantly. {% endhint %} {% hint style="info" %} This guide provides[ a bear market perspective on the leveraged trading strategy ](/strategy/extending-dex-networks/leverage-strategy-in-bull-market.md)discussed in the previous guide, which focused on a bull market. While there are many similarities in the fundamental concepts, if you have already reviewed the previous guide, you can simply refer to the sections relevant to the bear market. {% endhint %} [In our previous guide](/strategy/extending-dex-networks/leverage-strategy-in-bull-market.md), we examined the use of leverage in a bull market and explored the associated returns and risks. In this guide, we will employ a similar approach to analyze bear markets. One of the significant advantages of PNIX Dex is its ability to implement a short position strategy, allowing users to capitalize on falling markets using leverage. ## Using Leverage in Bear Market If you wish to trade with a larger volume than your own assets, leveraging other people's money becomes a necessary option. In financial terms, using someone else's assets is referred to as leverage. Leveraging involves using borrowed funds to increase your trading volume, allowing you to potentially make significant profits. However, it is crucial to ensure safe debt repayment. While it may sound simple, managing debt safely is a challenging task that requires a well-maintained system. To address this concern, the system incorporates measures to safeguard the assets of others, and traders must be aware of this and exercise utmost caution in risk management. ### Leverage Variables To engage in margin trading with leverage, you need to grasp certain numerical concepts. The table below illustrates the numerical values of the key variables for easy comparison. * **Leverage Level**: This variable determines the size of the asset to be traded, including the quantity of the asset you wish to trade. For instance, 3x signifies trading volume equal to three times your assets, which means borrowing twice as much as your assets. Similarly, 7x indicates trading volume equivalent to seven times your assets. * **Utilization of Borrowing Pool**: The assets I intend to borrow are the assets that someone has deposited in the lending pool within the service. It is a value that represents how much of the deposited assets have been loaned out. The Phoenix Protocol operates on a structure where the interest rate fluctuates in relation to this figure. In simpler terms, when the amount of loanable assets is lower, the interest rate tends to be higher. As a basic reference, we have set the interest rate at approximately 37.5%. * **Borrowing Interest APR %**: The interest rate on assets borrowed for leverage is calculated based on the utilization ratio mentioned earlier and is applied as compound interest. The loan period, which is equal to the length of the margin position, is necessary to determine the final interest. For this example, we have simply assumed a loan period of 14 days. * **Transaction Cost**: To make a reasonably close comparison, we need to estimate the transaction costs required to open and close positions. In our analysis, we have taken into account the slippage and trading fees that occur when trading in PNIX Dex. We have calculated these costs as 0.5% of the price and 0.25% of the trading volume, respectively. It is important to note that these costs are incurred when entering and exiting a position, respectively.
### HOLD vs. 3x vs. 7x The two tables below show the results of calculating how the profit and loss change as the price of the underlying asset changes with the short position of the two leverages. These calculations include transaction costs, among other factors. > Trading short positions in PNIX DEX essentially involves two steps: > > 1. To begin margin trading with leverage, select the underlying asset of the market, such as WEMIX, ETH, or a game token, as the starting asset for trading. Borrow the same asset additionally, sell all leveraged assets, and maintain Wemix$ as the position asset. > 2. As the price of the underlying asset decreases, buy the underlying asset again at a lower price, repay your debt, and generate profits. * **Debt Value (%)**: The percentage change in the value of a liability corresponds to the price movement of the underlying asset. Unlike long positions, where the underlying assets equal the liabilities, in short positions, the value of the position asset remains unchanged, while the value of the liability changes proportionately with the price movement of the underlying asset. As a result, while long positions calculate profit and loss based on changes in the value of position assets, short positions calculate profit and loss based on changes in the value of liabilities. * **HOLD**: This value represents the change in the underlying asset's price if you simply hold it without making any leverage. * **Position Value (Leverage)**: After selling all the underlying assets borrowed using leverage from PNIX DEX back to Wemix$ - taking into account the transaction cost during the selling process - the value is based on price fluctuations. Unlike long positions, Wemix$ is held as a position asset, so it is not affected by price fluctuations of the underlying asset. * **Debt Value**: In the case of a short position, both the initial trading start asset and the debt asset are the underlying assets. Therefore, changes in the price of the underlying asset and the value of the liability fluctuate proportionally. * **Equity Value (Leverage)**: The Exit Equity Value is the net trader assets minus the liabilities held in positions. It represents the calculated cost of the transaction required to exit the position. * **Margin vs. HOLD (Leverage)**: Exit Equity Value - HOLD * **Profit (Leverage)**: Exit Equity Value - Trading Funds($100). As with the long position, you can see that the profit is negative when you look at the entry point of the short position. * 3x : $-5.64 * 7x : $-13.92 The greater the leverage, the greater the potential loss. This includes the transaction costs incurred when entering the position, which increase proportionally with the position size. While higher leverage offers the opportunity for significant profits, it also entails higher risks and additional costs that must be carefully considered.

Change in the value of a 3x short position as the price of the underlying asset changes

Change in the value of a 3x short position as the price of the underlying asset changes

The diagram below visually compares the change in equity value when holding the asset (HOLD) versus trading with leverage, according to changes in the price of the underlying asset. While the increase is linearly proportional to the value of the underlying asset, it is evident that the return varies significantly depending on the leverage used with the same amount of assets. In short positions, profits and losses occur in the exact opposite direction of long positions for changes in the underlying asset. This implies that you can capitalize on market trends even in a downward market, just as you can in an upward market.
The diagram below also compares the return of each leveraged position versus HOLD.
### Risk Management In the table above, there are calculations for debt risk management. * **Debt Ratio (Leverage)**: Debt Value / Position Value\ The ratio of a position's assets to its liabilities is equal to 100%, meaning that the position's assets and liabilities are balanced. However, in order to completely eliminate the debt, one must consider transaction costs, requiring the maintenance of a safety margin above 100%. This safety margin is known as the forced liquidation threshold. It ensures that even if the market moves against the position, there is still enough value in the assets to cover the liabilities and prevent liquidation. * **Liquidation Threshold**: To safely use other people's assets, the system triggers forced liquidation when a position's losses exceed a certain level. The debt ratio for forced liquidation is defined for each market. Traders must exercise extreme caution to ensure that the debt ratio does not cross the threshold. In the event of forced liquidation, your position will be liquidated, and your debts and liquidation fees will be deducted, leaving only the remaining amount returned to you. It is crucial to manage risk diligently and maintain a safe margin to avoid reaching the forced liquidation point. The diagram below provides a visual representation of the debt ratio for each leverage. The debt ratio for each leverage at the time of entering the position is as follows:. * 3x Debt ratio : 67.56% * 7x Debt ratio : 86.86% The current forced liquidation thresholds for simulation are 80% for 3x leverage and 7x leverage, subject to forced liquidation from the start. For calculation purposes, the forced liquidation threshold of 7x leverage is raised to 95%. However, it is essential to note that this is a highly risky operation from the system's perspective, and mishandling it may lead to bad debts, resulting in losses for depositors of the lending pool. Therefore, high-leverage trading is only possible when there is a certain level of liquidity and price stability guaranteed. The price movements of the underlying assets close to each forced liquidation threshold are as follows: * 3x Debt ratio (Rate of chage in the underlying asset's price) : 81.07%(20%) * 7x Debt ratio (Rate of chage in the underlying asset's price) : 95.55%(10%) In the case of 3x leverage, even if the price of the underlying asset goes close to 20%, it is still manageable. However, in the case of 7x leverage, it is subject to forced liquidation. Therefore, when engaging in margin trading with leverage, it is crucial to be aware of forced liquidation and have a strategy to stop the position before reaching the threshold. In a market with high price volatility, trying to constantly monitor the market can be very inefficient. Fortunately, Phoenix Dex offers a stop order function for automated stop-loss selling, which can streamline the process. You can refer to our previous breakout strategy guide for an example of how to use stop orders effectively. In conclusion, this guide covered the basics of using stop orders in your trading strategy and how to utilize leverage to navigate both bull and bear markets. Moving forward, we will explore some more advanced strategies.
--- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs-en.pnix.exchange/strategy/extending-dex-networks/leverage-strategy-in-bear-market.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.