5 Simple Tips on Crypto Margin Trading
Margin Trading can be a risky game to play. Yet, if used correctly and with prudence, it can also help us reap better returns on our investments.
For a quick background, let us explain what is margin trading and how does it work when it comes to trading cryptocurrencies.
What is Margin Trading?
Margin trading with cryptocurrency allows traders to open a position with leverage and trade without putting up the full amount.
Simply put, it increases your buying power through leverage on your existing positions/funds and allows you to buy more cryptocurrencies than what you usually can.
By buying or selling on margin, traders can scale up their buying power or Leverage, potentially generating multi-fold profits beyond what their initial funds could have done (although you need to pay interest on it which we will cover later).
How to open an account
There are plenty of crypto-currency exchanges — in fact, 199 of them when i check it out in coinmarketcap as of 1st August 2018. However, not many of them offer margin trading services.
Among the handful of the exchanges which provide crypto margin trading, I personally prefer Huobi Pro because of 2 main reasons:
(i) Huobi Pro has been offering margin trading for a few years now and established itself as the leading provider for margin trading of cryptocurrencies such as EOS.
(ii) There are many trading pairs available and the interest rate is relatively lower compared to other exchanges.
With that, let’s move on to the 5 things you need to know when it comes to margin trading in digital assets.
5 Simple Tips for Crypto Margin Trading
- Understanding Margin Maintenance Level
Before you even start margin trading, you will need to know the basic rules. One of it is Maintenance Margin Level.
According to Investopedia, maintenance margin is the minimum amount of equity (in the form of funds/positions) that must be maintained in a margin account. In the context of the crypto market, an investor must stake a certain coin like USDT or BTC as equity.
In the event that the coin moves in the opposite direction of your position and goes below your maintenance margin, a “margin call” is triggered. The exchange will either start liquidating your assets to get its money back or will simply request the funds from you through SMS/email.
Thus, the maximum you can lose is the amount you invested (your initial margin) in order to open the position.
2. Know Interest Rate of a Coin
The range of the interest rates varies widely across crypto trading platforms and crypto trading pairs. It is similar to Forex where the more popular trading pairs (e.g. BTC/USDT or ETH/USDT) gets a higher leverage as there is more volume for them.
Take for example: Huobi Pro platform, their daily rate of loaning USDT is 0.1%. Daily rate of loaning altcoins such as BCC, ETH, LTC, ETC, DASH, XRP, EOS, OMG, ZEC is 0.02%.
Most platforms use 24 hours as a day and any time less than 24 hours will be considered as the full 24 hours. Do remember to repay the interest when you repay the loan too!
3. Open small positions gradually
It’s definitely tempting to just show hand and hope that things work out in your favour. Reminds me of the article where the family sold their entire house to whack it on Bitcoin.
To me, that’s totally insane and dangerous. One should never put all his eggs in one basket by plowing all into crypto-currencies.
It is the same when it comes to margin trading. Given that its a relatively new thing for many people, its important to take things slowly and open Buy/Sell positions over time to gain more experience too.
4. Be aware of news and developments
The crypto space is still in its infant stage with countless of ongoing ICO projects. As such, it is rife with all kinds of speculations, fake news and government clampdowns etc.
For example, NEO price fell more than 60% to US$13.56 one year ago due to China’s government hard stance on cryptocurrencies. Another recent one is where U.S. announced that a Bitcoin ETF may be in the works, which led to Bitcoin to surge momentarily.
In short, the crypto space moves quickly based on any new developments. Thus, one ought to be aware and careful especially for margin trading of crypto-currencies.
5. Stick to your GamePlan
Imagine playing soccer with a team that has no game plan. You can literally see everyone rushing for the ball, throwing away all the roles of defenders, midfielders and stuff.
Trading is the same thing. You need a gameplan to raise your success odds. Things to include in the plan are:
- Crypto-currencies you will trade
- Trading strategies you will use (swing or position trading?)
- How much money in each trade
- Your loss thresholds
- A trading log or method for tracking results on both open and closed positions.
Last but not least, having a trade plan allows you to keep your emotions in check -> the number one reason why most people fail in trading.
Conclusion
Margin trading of cryptocurrencies can potentially amplify your gains but also increase your risks significantly as well. Therefore, it is advisable to make short-term trades as digital assets are already imbued with extreme volatility.
At the end of the day, crypto margin trading works as a double-edged sword and you should only trade with money you can afford to lose.
The material provided herein is general in nature and does not take into account your objectives, financial situation or needs. While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. For the avoidance of doubt, this article is solely intended to be for general information on the usage of the Huobi Platform and does not in any way constitute as professional advice or financial advice. This is not an invitation or an offer to buy or sell cryptocurrencies, nor is it a recommendation to buy or sell specific types of cryptocurrencies. Trading cryptocurrencies on margin carries a high level of risk that may not be suitable for some. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice.