What is Margin Trading?
Margin, Leverage, and Margin Trading are all important terms to understand when trading on a multi-asset trading platform such as TradeConnect.
Many people may have heard of Margin, Leverage, or Margin Trading but if you ask them to define what they are, that’s when it can become a complicated discussion. This is often the case as most crypto traders either haven’t come from a traditional trading background and therefore don’t always understand the concepts, how they are used, how they are calculated, or the significance that each plays in an individual’s trading strategy.
Not to mention, the rules for Margin Trading often differ across each trading platform and can even differ across financial assets within the same platform so it’s understandable why traders often have various definitions of how each works.
So let’s start by taking a closer look at Margin Trading to ensure we have a common understanding of what it is and why it is so popular and how you can begin trading on margin with TradeConnect.
In basic terms, Margin is simply borrowed money and it is used by traders to try and magnify their trading gains on a margin trading platform. Margin is often expressed as a percentage. E.g. 1%.
The “Margin requirement” is the minimum amount of money (or margin) that a trader needs to put forward in order to open a trade and maintain a position on a margin trading platform.
Margin requirements differ on each trading platform according to market, asset type, and position size so it is important to always read the contract specifications for each asset when using margin to trade on a new platform.
Understanding how and why margin works is a key element to developing a holistic understanding of successful CFD trading.
Leverage is simply the increased “trading power” that you gain when using a margin account to trade.
Whilst examples can get complicated, it is important to remember that “Leverage” and “Margin” actually refer to the same concept just from slightly different perspectives.
Margin, which is the borrowed money that you get from your margin trading platform, is used to create leverage.
Leverage Ratios
Leverage is defined as a ratio. When trading on margin, you will either see your leverage in one of two formats:
The following are examples of leverage ratios that you will see when trading on margin and the amount of margin that you would need to open a position on that particular platform:
Margin requirement vs Leverage ratio
Now that we know what margin and leverage are, it is much easier to understand what margin trading is.
Margin trading (or trading on margin) is simply a method of trading whereby you use borrowed funds (the margin) from a trading platform in order to trade the platform’s financial assets.
Trader’s do this as the borrowed margin (and leverage ratio) has the potential to substantially increase their earning potential. With that said, it is important to remember that trading on margin can also increase potential losses also, so it’s incredibly important that you think carefully about the amount of margin you want to use on your trading account.
The amount of funds that can be borrowed on margin is determined by the platform. This is why you will see some assets traded at 10x (10:1) and others at 500x (500:1) or even more.
In most cases, margin trading is used for shorter-term trading opportunities as the longer you hold an open position when trading, the greater the cost can be which will then reduce the overall ROI of your trading account.
If you wanted to trade 1 standard lot of EURUSD without margin, you would likely need $100,000 in your trading account. This is mostly outside of the limits of many crypto traders.
Instead, by using a leverage ratio of 100:1, (or a 1% margin requirement) you would only need to deposit $1,000 into your trading account.
There are many reasons why margin trading is popular amongst crypto traders, including:
- Smaller upfront deposit required with the same market exposure
Margin trading gives you the opportunity to gain the same amount of market exposure to an asset by depositing only a fraction of the total value of your trade. This leverage is very useful to CFD traders because it means you can put your money to use elsewhere simultaneously. - Ability to magnify your returns
When done skillfully, using margin can help to magnify your returns. Don’t forget that it can also magnify your losses so always use margin responsibly. - Ability to Trade Large Positions
Margin trading also gives you the ability to enter into trading positions that are larger than your account balance which is a big pull for traders who don’t have the up-front capital to make the trades they want to trade. - Ability to Trade More Expensive Assets
Lastly, trading on margin also offers flexibility to traders who want to take advantage of market opportunities by borrowing money to trade sizable assets that they may not otherwise be able to afford.
Interested to try margin trading? As a special bonus for our traders, you can get $50 in BTC or ETH FREE when you complete 10 Trades on TradeConnect.
Originally published at https://medium.com on June 26, 2020.
