A Case Study in Effective Risk Management: Analyzing ETH-B Vault #29822
In this blog post, we will analyze the thought process of a user who demonstrated effective risk management strategies in their ETH Maker Vault.
By dissecting their actions, we aim to provide insights into the importance of risk management and offer guidance for other users looking to improve their skills.
Remember that this analysis will be speculative and for educational purposes only.
The User's Thought Process and Risk Management:
Deposit and Increase Multiply
On January 23, our user deposited 130 ETH into their pre-existing vault, signaling their confidence in the market. The same day, they increased their multiplier from 1.30x to 1.83x.
This move amplified their potential gains by borrowing additional DAI and swapping it for more collateral.
As it can be seen in the transaction details below, the vault owner bought almost 244 ETH at $1,626.52.
This action can magnify profits and losses; the user's decision to increase their multiplier demonstrated their belief in a potential price increase for ETH.
Setting a Stop Loss
To manage the risks associated with the previous action, our user set a stop loss at 186.00% CR (1) on January 23.
This move shows a keen awareness of the potential downside and the importance of a safety net.
The stop loss provided an exit strategy, ensuring that if the price of ETH fell to approximately 1,400 USD or below, the position would be automatically sold to prevent liquidation.
This is a drawdown of approximately 24% on the underlying, so we can deduce from this that this user may not be risk-averse but clearly understands his strategy and the tools at his disposal.
(1) When setting up a Stop-Loss Trigger, you must provide a Collateral Ratio value, not a USD amount. https://kb.oasis.app/help/why-can-t-i-set-a-target-price-instead-of-a-collateralization-ratio
Stop Loss Triggered
On March 10, the stop loss was triggered when the price of ETH dropped to 1,380 USD.
This event indicates that the market moved against the user's expectations. However, due to their prudent risk management strategy, the stop loss limited the trader's losses.
Stop loss automatically sold their position when the price reached the predetermined level and avoiding getting liquidated, saving up to 13% in liquidation penalties.
It's worth noting that the trader has closed their vault to DAI. By doing so, they reduced their exposure to potential losses as the value of their collateral decreased.
This suggests that the trader proactively managed their risk, reducing their exposure before the market moved against them.
This case study highlights the effectiveness of risk management in action. Our user's thought processes and actions demonstrate the importance of preparing for potential gains and losses and using Oasis Automation features in your strategy.
This vault was found after an exhaustive search in Discover Oasis, a dashboard that allows you to see all vaults opened using Oasis and a series of stats about them.
You can find the vault history here: https://oasis.app/29822#history
April 6, 2023