What is margin trading?
Margin trading is the practice of trading on the spot market using borrowed funds. The trader borrows them against their own assets — margin. He pays an hourly interest rate commission for the use of credit funds. How does it work? How do you put it to use? Let’s find out together!
Margin trading allows users to increase their purchasing power and potential profit from rising cryptocurrency prices while also earning from falling cryptocurrencies. Margin ensures that the customer will meet debt obligations in accordance with the rules of the exchange, which acts as an intermediary between borrowers and lenders.
What is leverage?.
Leverage is the ratio of leverage to margin. Borrowed funds can range from 2x to 100x in the cryptocurrency market. Trading with 10x leverage means that with a $1,000 USDT deposit, a trader can borrow 9,000 USDT from a broker and open a trade worth up to $10,000 USDT.
What is margin call and forced liquidation?
Margin call and liquidation are protective mechanisms of the exchange that prevent debt from traders and losses from creditors.
A margin call is a request from a broker to deposit additional margin into an account to cover the collateral on an open position. It occurs when a trader’s margin level enters the risk zone, which is calculated for each pair based on market depth and trading volume.
Liquidation is the forced closing of a position in which the sum of losses is nearly equal to the deposited margin.
When the risk zone is reached, the trader receives a pop-up notification or a letter recommending that additional funds be deposited. If he ignores the message and the price falls, the exchange liquidates the position.
The trader can close the transaction without waiting for liquidation — either manually or with a stop loss. He will then lose only a portion of his margin.
What is cross margin and isolated margin?
Margin usage includes cross margin and isolated margin. In the first case, the trader uses all of his funds to secure open positions, whereas in the second, he allocates a specific amount to each transaction.
When using cross-margin, profits from one trade can cover losses from other trades. At the same time, one unprofitable transaction can result in the liquidation of all open positions.
When using an isolated margin, the liquidation of one trade has no effect on other positions.
What is the index price in margin trading?
An index price is a weighted average price of an asset calculated using data from several markets. It is used by crypto exchanges to reduce price manipulation.
Binance, for example, calculates financial instrument price indices using data from Huobi, OKX, Bittrex, HitBTC, Gate.io, BitMEX, MXC, Bitfinex, Coinbase, Bitstamp, Kraken, Binance.US, and Bybit.
CoinEx then computes these values using data from Binance, Huobi Global, KuCoin, and Gate.io.
When the index price moves outside of a certain range during periods of high volatility, the crypto-exchange warns users of the high risk of position liquidation.
If one of the platforms is undergoing maintenance and/or its most recent execution price and trade volume update fails, CoinEx temporarily excludes it from calculations and aligns weights.
When setting a stop loss, an index price can be used as a trigger. This will prevent losses caused by local market fluctuations on the trading floor.
How to earn on margin trading in the long?
A long, or long position, is the purchase of an asset in anticipation of future growth. Leverage can be used to boost the potential profit from the subsequent sale of a financial instrument.
Example: A trader expects the bitcoin price to rise from 15,000 USDT to 25,000 USDT.
He deposits 3,000 USDT into a margin account and borrows 12,000 USDT at CoinEx to trade with 5x leverage. The interest rate on the loan is 0.15% per day.
A trader buys 15,000 USDT worth of bitcoins and sells the coins 10 days later, when the price of the asset rises to 25,000 USDT.
The net profit from the operation will be:
profit from selling 1 BTC (25 000 USDT) — debt to exchange (12 000 USDT) — payment to broker for the use of credit funds (180 USDT) — the initial capital of trader (3000 USDT) = 9820 USDT
Profit from a similar transaction without the use of leverage would be:
profit from selling 0.2 BTC (5000 USDT) — trader’s initial capital (3000 USDT) = 2000 USDT
How to make money on margin trading in shorts?
A short sale, also known as a short position, is the sale of an asset with the intent of later redeeming it at a lower price. Only margin trading allows you to profit from falling prices.
Example: A trader expects the value of a bitcoin to fall from 25,000 USDT to 15,000 USDT.
He buys 0.2 BTC at the current price and lends 0.8 BTC to CoinEx to trade with 5x leverage. The interest rate on the loan is 0.1% per day.
The trader sells 1 BTC and receives 25,000 USDT. After 10 days, the price of the cryptocurrency drops to 15,000 USDT, and he buys 0.8 BTC to pay off the debt.
The net profit from the operation will be:
The profit from selling 1 BTC at 25 000 USDT (25 000 USDT) — buying 0.8 BTC at 15 000 USDT to repay debt (12 000 USDT) — initial value of 0.2 BTC (5000 USDT) — fee to broker for using credit funds (120 USDT) = 7 880 USDT.
Advantages of margin trading with leverage
You can use leverage to:
- Trade several assets in different markets at the expense of increased capital in circulation;
- Achieve financial goals faster than in similar trading on the spot market without leverage;
- Receive an unlimited potential profit — unlike the futures market, the crypto-exchange does not initiate the auto-deleverage procedure.
Risks of trading with leverage
When trading with leverage, losses can exceed 100% of the initial deposit. During periods of high market volatility, the strategy is particularly risky. Technical issues on the trading platform can cause delays in order execution and loss of funds.
Have you ever practiced margin trading? Was it successful? Tell us about it!
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