Margin Trading — what is it?
Learn how margin trading works
The popularity of cryptocurrencies is increasing. Their use is becoming more and more common. That is why it is worth expanding your knowledge on this topic. Today we take it on a plate as the main dish, not DIP. What is margin trading? Let us dive into that topic!
What is Leverage Trading?
What does the concept of trading with leverage mean? Traditional trading is based on the capital we currently have. On the other hand, an account on the stock exchange that has access to the leverage function allows investors to take advantage of the opportunity to increase the invested capital as they multiply it with a loan; however, there is also a risk as you can lose your assets faster.
This trading option is popular in markets that have low asset price volatility. Sometimes crypto exchange platforms decide to lend to traders interested in margin trading on their own. After all, this is a little-known and exploited opportunity.
How does leverage work ?
If you want to start trading with leverage, you need to provide a certain percentage of the total loan value. This percentage is simply a margin and is related to the whole idea of margin trading. Leveraged orders are created based on the number of funds in the deposit. On the other hand, leverage is the ratio of the funds contained in the loan to the value of the margin. It looks something like that if you want to make $ 100,000 trades with a 10: 1 leverage, you need to have $ 10,000 of your funds.
The most common leverage is 2:1. In the margin futures markets, trading takes place with leverage of 15:1. When it comes to the crypto industries, the leverage used ranges from 2:1 to 100:1.
Pros and cons of margin trading
One of the main advantages of trading with leverage is simply the possibility of more profit based on the better value of your trading position. This additional type of transaction is proper when diversifying your trading strategy. Traders using leverage trading have the opportunity to create several positions using a small amount of their capital. And an equally important advantage is that the margin account makes it easier for traders to share them quickly, so they do not incur the costs of transferring money between accounts.
However, a significant disadvantage of this process is the risk of increasing losses. In traditional trade, we use private capital. On the other hand, leverage introduces the risk of losses exceeding the trader’s initial capital as part of the funds is earned in a loan. Depending on the leverage used by the market participant, the losses can be huge even with a slight decrease in the value of the invested asset. That is why an appropriate trading strategy or alternative market management methods are crucial in this process.
Cryptocurrencies and margin
After all, margin trading is riskier than traditional ones, especially in the cryptocurrency markets. Currently, the volatility of cryptocurrency prices is high, so you should be especially careful when taking actions related to margin trading in the world of crypto. It is not worth using at the beginning of your crypto adventure.
Analytical predispositions, proper identification of market trends, or determination of entry and exit points are insufficient to avoid risk when trading with leverage. However, such skills can help you develop a better trading strategy. If you want to try this type of trading, first carefully study the basics of technical analysis and gain your first experience in crypto trading.
Are you afraid of too much risk associated with margin trading? There is a special kind of trading for people like you — margin funding. Trading platforms, including crypto exchanges, offer their traders the opportunity to transfer funds to users to finance transactions with the leverage of other users.
This is done according to the rules defined earlier and accepted by both parties to such a transaction. If the trader agrees with the terms of the margin funding, the lender has the right to obtain regular repayment of the loan granted with interest. Although the rules of operation of this type of trading differ depending on the platform — the risk of providing a margin fund for other traders is low. But why? Because leveraged positions can be removed to prevent possible losses. However, all funds must be held in the exchange during this process.
Proper application of this process will make your investments more profitable. If you make the wrong decision, the losses can be huge. That is why this type of trading is dedicated to the most experienced traders.
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FMFW.io does not provide financial, legal, accounting, or tax advice. Any statement regarding such matters is explanatory and may not be relied upon as definitive advice. All users are advised to consult with their financial, legal, accounting, and tax advisers regarding any potential investment or trading activity.