Effective and well-informed risk management should be a priority for all crypto traders, particularly those who adopt higher-risk methods such as margin trading. Various risk management tactics are out there today, and one of them is to look at mark price. The mark price can offer a more accurate reflection of the true value of a derivative, and is used by traders to avoid unexpected forced liquidations.
Understanding what the mark price is and how it's calculated is essential for any crypto trader. We'll explain all this and more in the following article, to help you adopt this risk management essential and make more informed crypto trading decisions.
TL;DR
Mark price is calculated as the weighted average price of an asset across multiple exchanges. The mark price is considered to provide a more accurate representation of an asset's price by smoothing out the price discrepancies seen across exchanges.
Understanding the mark price is an influential tactic for effective risk management. It provides traders with a more accurate view of asset prices to help them make more informed trading decisions.
The mark price differs from the last trade price. Where the mark price represents an asset's average price drawn from prices across multiple exchanges, last trade price refers to the price of an asset's most recent transaction.
Crypto traders can use the mark price to set accurate liquidation levels, calculate appropriate stop-loss levels, and apply limit orders effectively.
What is mark price?
Mark price is a reference price that's calculated from the underlying index of a derivative. This index is often calculated as a weighted average of the spot price of an asset across multiple exchanges. The aim of this calculation is to avoid price manipulation on a single exchange and provide a more accurate representation of the value of the asset. The mark price takes into account both the spot index price and the moving average of the basis. This moving average mechanism helps to smooth out any abnormal price fluctuations and reduces the chance of forced liquidations.
Mark price calculation
Mark price is calculated as the spot index price plus the exponential moving average (EMA) of the basis. Alternatively, it can be calculated as the spot index price plus the EMA of the average between the spot best bid and ask prices minus the spot index price. The mark price is more independent than the last traded price and can provide traders with a more reliable reference point when making trading decisions.
Mark price formula
Mark price = Spot index price + EMA (basis); or = Spot index price + EMA [(spot best bid + spot best ask) / 2 – spot index price]
A quick guide to the formula's terms
EMA (exponential moving average): EMA is a technical indicator that tracks an asset's price changes over a period of time. EMA is considered a better indicator than simple moving average because it gives more weight to recent data, rather than treating all data points equally.
Basis: The difference between an asset's spot price and future price. Traders use the basis to understand how the market views an asset's future price compared to its current price.
Spot best bid: The highest price a trader is willing to buy an asset on the spot market at a specific moment in time.
Spot best ask: The lowest price a trader is willing to accept for an asset on the spot market at a specific moment in time.
Spot index price: The average price of an asset across multiple exchanges. The index price is considered to provide a more accurate representation of an asset's price, as it accounts for the price discrepancies across different exchanges.
The difference between mark price and last trade price
The mark price and last trade price can provide traders with valuable information about their positions. The difference between the two prices can be used to make informed trading decisions. For example, if the last trade price goes down but the mark price stays the same, your position won’t trigger a forced liquidation. However, if the mark price crosses the threshold for a margin call, you could see your position liquidated.
How is the mark price used by exchanges?
To protect users' interests and eliminate malicious trading activities, some exchanges (including OKX) use the mark price system rather than the last traded price to calculate users' margin ratios when margin trading. This can effectively prevent users from being forced-liquidated if the last traded price is manipulated within a short period of time. The estimated forced-liquidation price will also be adjusted based on the mark price. When the mark price reaches the estimated forced-liquidation price, full or partial liquidation will be triggered.
How to apply the mark price
Understanding the mark price is just one part of the battle. Read on to understand how to apply mark price to your trades.
Calculate your liquidation level
When planning a trade, consider using the mark price to calculate what price your trade will be liquidated at. Using the mark price in this scenario can help you to set an accurate liquidation level that reflects broader market sentiment. Equipped with this knowledge, you can add more margin and avoid liquidation caused by sudden short-term volatility.
Place accurate stop-loss orders
Related to the tip above, many traders use the mark price to set their stop-loss orders rather than the last traded price, for better accuracy. Here, traders would typically set the stop-loss slightly below the liquidation mark price for a long position and slightly above it for a short position. This step can provide some protection against volatility and theoretically means your positions will close before the liquidation level is reached.
React faster to opportunities
Consider using a limit order set at mark price levels to automatically open positions at the most favorable time — according to your deep technical analysis, of course. Doing so helps you avoid a missed opportunity for a potentially rewarding trade when prices for your chosen trading pairs trade around the mark price.
The final word
Traders of all experience levels require a stable and reliable reference point to make informed decisions. For many, the mark price provides this reference point, as it takes into account the underlying index and the moving average of the basis across multiple exchanges.
What's more, exchanges like OKX use the mark price system for margin trading to protect users from forced liquidations, and provide an accurate representation of the value of a derivative.
If you're looking to trade digital assets, the mark price is a valuable tool you can use to help make informed decisions and increase your chances of trading success.
FAQs
Exchanges use the mark price to calculate margin ratios and protect users from forced liquidation as a result of price manipulation. Meanwhile, traders calculate the mark price to make more informed decisions when setting liquidation levels and stop-loss points.
Mark price is calculated using the following formula. Mark price = Spot index price + EMA (basis); or = Spot index price + EMA [(spot best bid + spot best ask) / 2 – spot index price]
Exchanges that apply the mark price to calculate users’ margin ratios will regularly apply this formula to gain an up-to-date view of margin ratios and protect users from forced liquidation caused by price manipulation.
Mark price refers to the weighted average of the spot price of an asset across multiple exchanges. The market price, meanwhile, is the current price an asset is being bought and sold at on an exchange.
Although mark price theoretically provides a more accurate view of an asset's price, risks remain. One risk is that of forced liquidation should the mark price move faster than expected during periods of high volatility. In this situation, you may not be able to move fast enough to close your position before forced liquidation occurs.
Another risk is the overuse of the mark price by some traders, who sometimes neglect other influential risk management tools. It's wise to use a variety of risk management tools when planning and executing trades to help mitigate volatility.
