Before you get started though, you need to keep in mind the research. If you want to learn more about leverage and margin trading, how you could make your portfolio green, as well as the risks involved.
How margin trading works?
- margin trading involves using capital borrowed from a broker to invest in something
- it has become increasingly popular in recent years because unlike regular trading, margin trading allows you to gain access to larger sums of capital and leverage your position.
How does leverage trading work?
- at margin account, you put in a percentage of the total order value. Here comes the role of leverage. Traders use margin to build leverage. Leverage gives you increase your funds by allowing you to open larger positions than you can if you using only the funds in your account. You will usually see leverage described as a ratio, such as X3, X5, X20 …etc.
- margin trading can be used to open both long and short positions
- if you think the value of the currency is going to go up (and profit from the price rising) or sell it if you think it is on the way down (and profit from the price falling).
When you trading on margin and through leverage, how do you manage risk?
Margin trading can maximize your gains, but this means that it can also maximize your losses. This is the biggest risk of margin trading. Here are some tips on how to manage this risk.
- Stop Loss: A stop loss is a risk management tool designed to close a position at a certain point if the market moves in the opposite direction to your view of the currency. It is a really useful way to make sure that you know exactly how much money you are risking to lose.
- Don’t risk more than you can afford to lose. No matter how successful your strategy is, margin trading can run counter to you very quickly, so you should never invest more than you can afford to lose. In general, risking more than 5% of your account raises the risk even more. If you want to invest an amount that you can repay, go with your investments away from risk.
- Take Profit: Similar to reversing your stop loss, you can set a Take Profit order to close your position when profits reach a certain point. Since the cryptocurrency market is so volatile, it might be smart to get out before the stock turns against you.
Advantages and disadvantages of leverage for cryptocurrency trading
Like all trading strategies, margin trading assets such as cryptocurrencies have their pros and cons. The advantages and disadvantages tend to largely opposite each other. For example, your potential profits are greater, but at the same time you are vulnerable to a price flip against you. Similarly, you can easily and quickly diversify your portfolio at the expense of much higher risk than other trading methods. See the below table for additional examples:
|Rising profits||Rising Losses|
|Trade with limited funds||Can lose capital quickly in volatile markets|
|Teaches discipline and risk management||Harder for newbie traders|
Margin Trading Risk Management Tips:
- Always start trading with small amounts: Want to trade margin on the first day? Then always start with a small capital. Gain the necessary confidence and knowledge you need before jumping into the dangerous price swings of leveraged trading.
- Don’t go all-in at once: Unless you’re sure about your trading skills, it’s better to divide your position into parts, and create a price gradient. This way, you can Minimize the risk while averaging down the entry price of the position. The same is true for taking profit. You can set-up a gradient of take-profit levels.
- Price manipulations and short/long squeeze: In an irregular market like crypto market, it’s not uncommon to see every now and then short and long presses. When the number of short or long positions is high, it means that a market maker can make easy money when creating an opposing price move, forcing those positions to liquidate (and push the price even more in that direction).