Margin trading for newbies — a Q&A explanation
Onederx is continuing to share valuable knowledge — our aim is to help beginner traders find their way around the world of futures trading, using the crypto market as an example.
Margin trading is one of the most profitable trading — but also one of the riskiest. The idea is simple: a trader borrows money (usually from an exchange or broker) at a rather high interest rate to increase his or her leverage.
Margin trading is very popular because makes it (theoretically) possible to increase one’s capital dramatically if everything goes well. It is indeed a kind of leverage that multiplies your profits — and your losses, too. When a trader makes a $10 000 deposit with a broker, he or she hopes to earn millions, of course. So the question of getting leverage or not is a formal one rather than practical. Indeed, who would be able to resist a temptation to grow their deposit quickly?
If you are lucky, you can get rich quick, but on the other hand, just one wrong move can ruin a trader — first the exchange will ask that they increase their deposit and then will simply cancel the order, with all the money getting lost.
There are exchanges that offer 1:1 leverage, meaning that a trader can borrow as much as he or she already has. This means that a trader with 1 BTC in their account will trade 2 BTC, increasing the potential profit. Other exchanges offer leverages ranging between 2.5:1, 3.3:1, 20:1 and even 100:1. When trading with 100:1 leverage, you can both earn 500% on your deposit in a few minutes or lose everything in the blink of an eye.
Onederx currently offers 20:1 leverage, but we plan to increase it to 100:1 in the near future. We offer traders leverage when trading in futures, which will be the subject of a separate discussion.
Margin trading allows our users to trade actively and to earn more. Having a $1 balance, a trader can open positions of up to $20. Our brilliant risk management system allows fair margins up to 20× without causing any nasty liquidation accidents.
Let’s take a look at the very basics of margin trading, using the crypto market as an illustration and structuring our explanation as a series of questions and answers. If you’ve never bought any bitcoins or traded them at an exchange, then you might find our explanation complicated; however, beginner traders with even minimal experience will surely figure it out soon.
How to do margin trading?
There are two main options: long trades (also known as “buy”) — buying an asset hoping that its price will go up; and short trades (“sell”) — selling an asset and hoping that its price will go down.
Why do you need leverage?
If you are sure that the price is going to move in a certain direction, you can use leverage to maximize your profit. To do this, you need to borrow from the exchange.
What are the risks of margin trading?
While leverage trading provides obvious opportunities, one should not forget about its risks.
This type of trading has two key flaws. First, the interest rate on borrowed funds is quite high, and it is charged automatically whenever an order is closed. Second, if your price forecast proves wrong, you will lose money and your order can be cancelled, leading to the loss of all your money.
Margin call or the requirement to increase the deposit
If something goes wrong with your margin trading, the exchange will ask you to increase your deposit (minimum margin) to avoid your order being cancelled — this is known as margin call. If a trader cannot provide additional funds to support their order, the trade will be closed automatically.
What margin level should I choose? How can I evaluate the risk?
As a rule of thumb, you should choose a margin that allows you to survive large fluctuations on the way up. Each individual asset is special. Buying with a margin that will surely lead to a margin call is stupid, of course. The art of using leverage includes precisely evaluating the risk in order to minimize the risk of a margin call.
Common sense tells us that the only sure way to control risks at an exchange is to invest what you are prepared to lose. You should also understand that good trading is possible only in the absence of stress and psychological pressure.
The very idea to earn a sum that exceeds your starting capital manifold is a very risky one. Only an experienced trader with 10–15 years in the market can set such a lofty goal — and even such a trader will hardly wish to risk all their hard-earned money for a chance to get superlucky.
What matters to an experienced trader is usually not an accidental stroke of luck but regular, stable profit; conversely, if a trade ends with a loss, it is better to lose a little and lose it fast, rather than lose a lot and keep losing for a long time. This is a good time-tested rule.
Why are so many people attracted by crypto trading, and why is margin trading particularly popular in the crypto market?
Crypto trading owes its popularity to its extreme volatility — sudden fluctuations in both direction. When using leverage in these conditions, a trader can get rich with just one successful order. Human greed on the one hand and high volatility on the other make margin trading so widespread.
We should also note that futures contracts are a particularly convenient tool for trading on a falling market. Our exchange gives you the possibility to short the market as effectively as possible using the popular BTCUSD Perpetual Contracts.
· Our official Telegram channel