# Leverage Strategy in Bull Market {% hint style="danger" %} Margin Trading is scheduled to be serviced in 4Q 2023. The strategies in the guide assume special market conditions for the convenience of explanation. However, it is essential to keep in mind that risk management is of paramount importance because, in reality, market conditions can be quite different. {% endhint %} In this guide, we explored a [breakthrough strategy](/strategy/extending-dex-networks/breakthrough-strategy-using-conditional-orders.md) example and examined the utilization of trend-following strategies and the PNIX DEX stop order. We also observed that the timing of profit-taking significantly impacts the overall performance. Now, let's consider what would happen if you traded in larger quantities. Undoubtedly, larger trades could lead to higher profits, but it's essential to be aware that it also increases the level of risk involved. For experienced investors who are adept at managing risk, the trade volume size becomes a critical variable. PNIX DEX offers a means to trade with quantities larger than your existing assets, allowing you to leverage your trading potential. ## Using Leverage in Bull 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 long position of the two leverages. These calculations include transaction costs, among other factors. > Trading long positions in PNIX DEX essentially involves two steps: > > 1. Take Wemix$ as the starting asset for trading and borrow the same asset additionally. Then, use all of the leveraged assets to purchase the underlying asset in the market, such as WEMIX, ETH, or game tokens, and maintain it as a position asset. > 2. When the price of the underlying asset rises, you sell the underlying asset again at a higher price, pay off your debt, and earn the profit. * **Position Margin Value (%)**: The percentage change in the value of an asset held within a position is a result of a change in the price of the underlying asset. In the case of a long position, the asset held in the position is the same as the underlying asset, so it moves proportionately in the same direction. * **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 purchasing all borrowed assets using leverage as underlying assets in PNIX DEX, the value is calculated based on the price fluctuations, taking into account the transaction cost incurred during the purchase process. * **Debt Value**: In the case of a long position, both the initial trading start asset and the debt asset are Wemix$. Since the price change of the underlying asset is considered in terms of Wemix$, the value of the liability remains unchanged regardless of the price change of the underlying asset. * **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) If you examine the position entry point, you will notice that the profit is negative. * 3x : $-5.64 * 7x : $-13.92 As the leverage increases, so does the potential for larger losses. This includes the buy transaction cost incurred when entering the position, and it grows proportionally with the position size. While higher leverage offers the potential for significant profits, it's essential to understand that it also comes with a base cost and significant risk.

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

Change in the value of a 7x long position as the price of the underlying asset changes

The diagram below visually represents the change in equity value based on the results of the table above. It shows the equity value when HOLD (holding without leverage) is maintained and when leverage is traded, respectively, in response to changes in the price of the underlying asset. While the increase is linearly proportional to the value of the underlying asset, the return varies significantly depending on the leverage, even with the same amount of assets.
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) : 79.48%(-15%) * 7x Debt ratio (Rate of chage in the underlying asset's price) : 96.51%(-10%) In the case of 3x leverage, the position is subject to forced liquidation even if the underlying asset's price goes close to 15%. Similarly, with 7x leverage, forced liquidation occurs. Traders engaging in margin trading with leverage must be aware of forced liquidation and have a strategy to stop the position before reaching the threshold. In highly volatile markets, it can be inefficient to manually monitor the market, so Phoenix Dex offers a stop order function for automated stop-loss selling. An example of this can be seen in [our previous breakthrough strategy guide](/strategy/extending-dex-networks/breakthrough-strategy-using-conditional-orders.md). Next, we will explore margin trading with leverage in a bear market scenario.
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