Margin Trading Explained
Disclaimer: margin trading is a high-risk approach so it’s not recommended for beginners. Really, don’t borrow money from other traders or crypto exchanges before you’re familiar with traditional cryptocurrency trading and technical analysis. It may look simple but, most likely, you will end up with huge losses.
Well, hope you read the disclaimer. It’s important. Seriously. Okay, today, we’re going to talk about free money. Basically, margin trading is about getting the borrowed funds and using them for your own trading. Hence, you can put more money and increase potential profits greatly. Sadly, it means that potential losses grow, too.
This feature is widely used on the stock exchanges, Forex, and other fiat-related markets. But margin cryptocurrency trading is also possible. You can access it via suitable exchanges or trading terminals. However, to succeed in this competition, you want to know a bit more about margin, huh?
Leveraged Trading in a Nutshell
First things first, catch a bunch of useful terms:
- Margin. Actually, it’s own money of a trader. In other words, margin is an initial deposit you have to hold to be able to get leverage. For example, you can start with only 1 BTC and it will be your margin.
- Leverage. The money provided to a trader by a cryptocurrency exchange or by other market players. Say, by investing 1 BTC with 100x leverage, you will get 100 BTC for trading. Request 50x leverage — and you will get 50 BTC. Easy!
- Call. This action is also known as a margin call. It occurs when prices move down and a trader has to deposit more money in the account to meet the requirements. Fail to answer this call — and your funds will be liquidated.
- Funding. A pretty rare option that allows investors to lend their money. It works like a personal loan but handled by the exchange. You can provide your funds to traders and get them back with extra interest paid.
Historically, traders utilized margin features on low-volatile markets such as Forex. Our ancestors got wonderful opportunities to analyze prices, calculate everything, and open long or short positions with nice leverage. For example, stock markets feature a traditional 2:1 ratio while futures are traded for 15:1. Forex markets offer from 50:1 to 200:1 ratio depending on the brokerage and trading pairs.
Crypto markets also provide for margin trading. Don’t expect huge leverage as exchanges are still afraid to provide too large sums. For example, BitMEX’s leverage doesn’t exceed 100x but not all coin pairs are available under this ratio. Typically, the most popular rates are from 2:1 to 50:1. We suggest starting with 2:1–10:1 leverage if you didn’t perform margin trading before.
Pros and Cons of Margin
It may be useful to learn about the advantages and drawbacks of trading with leverage. Let’s repeat: never opt for margin trading if you don’t know technical analysis perfectly and have at least one tiny doubt about this feature. Just don’t.
Pros
- Increased profits. It’s clear. When you can trade 100 BTC instead of 1 BTC you can get 100x profits. Yeah, $400,000 instead of $4,000 in March-May, 2019.
- Elaborate diversification. With borrowed funds, it’s easy to open a few positions with tiny initial investments instead of putting all in one.
- Quick decisions. It happens that profitable uptrends end quickly. Thanks to margin, you can avoid sending money from wallets and catch the best prices.
Cons
- Increased losses. With 100x losses, you would spend $1,000,000 instead of $10,000 in January-February, 2018. And you can lose more than the deposit only.
- Even higher volatility. Because of the high difference between margin and leverage, even a 1% price drop may cause a call and, immediately, a liquidation.
- Interest rates. Trading with leverage is like getting a bank loan. Eventually, you will have to pay the interest. 5–10% isn’t a big deal but you still have to pay them.
Margin Trading with Superorder
Currently, our API trading terminal doesn’t provide a built-in margin feature. But, as long as we work directly with crypto exchanges, you can easily connect your margin accounts. Recently, we added the BitMEX support so it’s possible to use the trading automation even when you trade with leverage. Binance and Bittrex supported by Superorder plan to add margin trading soon, too.
Be sure to explore the terminal and try its features. Subscribe now and you will get 14-day free trial! Cheers.
