The cryptocurrency market is extremely volatile, and many traders earn fortunes, and then “merge” everything. Margin trading is used to minimize risks and increase the chances of making a profit.
Therefore, today we will talk about what margin trading is. We will also analyze the trading rules, advantages and disadvantages, as well as platforms where margin trading can be used.
Sit back, it will be interesting.
Margin trading is a kind of speculation on the difference of buying and selling a cryptocurrency asset with the involvement of borrowed funds of the exchange (also called “leverage”).
Under the opening of the transaction, the trader allocates part of his own funds in different ratios. For example, 1:10 or 1:15, that is, one tenth or one fifteenth of the capital is given by the user. This amount is called margin.
By obtaining borrowed funds, a trader can multiply the profit from the acquisition and subsequent sale of a promising crypto asset.
Traders open two types of positions on cryptocurrency exchanges that support margin trading:
The income of the user who predicted the trend movement in one direction is proportional to the size of the leverage.
For example, a trader deposits $1000 to the trading platform and opens a long position with a leverage of 1:10. The position opens at $10,000. If the price of Bitcoin or another asset has increased by 1%, then the user receives a profit from the transaction amount, that is, $ 100. After closing the transaction, $1100 will be credited to the account. If the trader did not use leverage, then his earnings would be a minimum of $10.
Please note that many exchanges charge commissions for trading operations in accordance with the rules of the site.
There is also a reverse side of the coin. The exchange sets the liquidation price when the position is automatically closed when the price reaches a certain mark. If the Bitcoin price drops to $9500 with an open long of $10,000, the systеm would automatically close the transaction, taking the user’s margin for itself.
Therefore, it is not necessary to use all the funds in the account for trading with leverage. It is more reasonable to let a part of the deposit into a risky enterprise so that it is possible to average positions and smooth out possible losses.
In classical leverage trading, the systеm should notify the trader about insufficient margin and the risk of canceling the position if he does not make a security payment (the operation is called a margin call). However, in cryptocurrency pairs, volatility is extremely high, so the term margin call is used by crypto enthusiasts when the margin is directly liquidated.
If everything is clear with this so far, let’s consider the basic trading rules that will increase profits and reduce the likelihood of losing funds.
These tips will help to avoid the mistakes of “hamsters”, and not to drain the initial budget on the mistakes of beginners. And we’re moving on.
Experienced traders always recommend setting a stop loss when opening a trade. This is an automatic limit for closing a position when the price reaches the minimum allowable mark.
This is useful so that the margin is not automatically liquidated by the exchange if the price tag for a cryptocurrency asset drops to a minimum.
It is quite difficult to determine the moment of “helicopters” on the market, and for many this phenomenon remains unpredictable. If you do not want to monitor the trend around the clock, it is better to set the minimum position in advance at which the transaction will be opened, thereby reducing the probability of losing the entire margin at times.
Let’s talk about the strengths and weaknesses of trading cryptocurrency with leverage.
Like any financial instrument, margin trading has strengths and weaknesses.
|The popularity and prevalence of the tool on cryptocurrency exchanges||A trader needs a serious background to master trading|
|It is possible to make a profit many times greater than personal capital allows||High risks of losing margin and funds in the account due to the high volatility of the cryptocurrency market|
|Margin trading improves trader skills|
If everything is clear with this so far, consider trading platforms where trading tokens with leverage is implemented.
There are several popular platforms for trading cryptocurrencies on the market:
Let’s briefly consider the criteria for choosing a crypto exchange for trading with leverage.
Experienced traders identify the following factors when studying crypto exchanges for margin trading:
platform should have assets with high liquidity and a large user base on the exchange so that you can close or open a position on the crypt at a good price at the right time.
Margin trading is an opportunity to quickly make a fortune at the expense of borrowed funds. Everyone in the world would already be millionaires if it weren’t for the high volatility of the cryptocurrency market. Therefore, trading with leverage is a high-risk tool that is suitable only for experienced traders.