Many experienced traders are engaged in margin trading. It is one of the trading tools that allow strengthening your trading position without having a large deposit. It can bring considerable profits even with a small investment. However, the risks are very high. In this article, we will describe what is cryptocurrency margin trading in detail.
What is margin trading?
Margin trading allows you to borrow funds to make an investment and then take the profit or loss from the changing markets. Also known as “leverage trading”, it allows people to trade with lower capital requirements, but both profits and losses are amplified, so it is considered “risky”.
Most cryptocurrency exchanges that provide traders with a margin trading function take these funds from a special reserve. Other users put funds into this reserve. They basically lend their assets and receive income in the form of interest. The leveraged trader is to pay the interest.
On some exchanges, like Poloniex, other users provide loans to traders. However, there are exchanges that issue such loans from their own reserves. On the Poloniex exchange, any user can loan their bitcoins or other altcoins and receive interest. Among other platforms that deserve your attention are Bitmex, Kraken, Bitfinex, CEX.IO, Huobi, and OKEx.
How to start trading with leverage and what are the risks?
There are various leverage ratios of crypto margin trading USA exchanges can provide. For example, you can trade with x125 leverage on Binance. Margin trading is available for US residents on the Kraken crypto exchange.
Margin trading is not a free tool. Once you use leverage, you pay a small fee to the exchange, as well as a percentage to those who loan you the assets (the exchange or other users). As your profit from leverage trade multiplies, the risks increase as well.
The maximum that a trader can lose in case of an erroneous deal is the amount the position was opened with. This amount is also called liquidation value. It is the level at which the exchange will automatically close the position if something goes wrong. In this case, the trader does not lose borrowed money, but only his own.
What does this mean? If during an open deal the price of the asset falls by the amount of the position, the exchange closes the deal automatically, and not in your favour. Margin trading is more risky and requires more experience and understanding of the market than more traditional share or asset trading.
Common tips for margin trading
The first and most important thing is your cool head and rational assessment of the situation. Don’t be greedy — trading is not a casino. Be sure to know your capabilities and limits and never wager more than you can afford to lose.
- Always fix profits and losses without waiting for big values.
- Cryptocurrencies are a highly volatile asset. Very often, the rate moves contrary to technical analysis. Trading on margin increases the risks in such a market.
- Start trying margin trading with small leverage. You should not work with large leverage if you have no experience. X2 will be quite enough to start.
- Be cautious when choosing a trading platform.
Remember that when a position is strengthened, even a slight fluctuation in price can lead to a complete closure of the transaction and loss of funds. For example, if you use x100 leverage, then even a 1% change in the price of an asset will not be in your favor. And as we all know, such fluctuations in the cryptocurrency market can happen in a matter of seconds.
How to make money in a downward market using margin trading?
There is a special tool that allows experienced traders to profit even when the price of an asset is moving downward. It’s called a short position. In short, a trader borrows funds, being confident that the market will go down in the future, and immediately sells them. If the forecast turns out to be correct and the asset price falls, the trader buys the asset back at a lower price and returns the borrowed funds. The difference between the rates, strengthened by leverage, is the trader’s profit.
Conclusion
Margin trading is becoming an increasingly popular type of trading. However, you should read the terms and conditions carefully before opening a margin account.
Don’t forget about the high volatility of the cryptocurrency market. Let the risk factor always remain in your mind when you open another margin trade. Do not chase extra profits, but rather work methodically and with a cool head. If you follow the mentioned advice and tips, you will reach success in the long term. Without adhering to these rules, the whole process of margin trading will not be very different from playing in a casino.