In recent years, trading on Bitcoin and other cryptocurrencies are becoming a common activity with the surge in acceptance of crypto assets. With the increasing number of crypto investors and traders across the world, a lot more crypto exclusive exchanges are coming up with advanced trading features like margin/leverage trading. The leverage trading is to take advantage of comparatively smaller price fluctuations, gear the trading portfolio for greater exposure with a marginal investment, and increase the profit percentage exponentially.
Leverage trading involves more risk than the usual spot trading, and crypto-assets are a great deal more volatile than equity and forex markets. With the right knowledge and detailed risk management strategy, one can make the most out of it.
In this article, you will learn about margin trading, important terminologies, how it works, and some of the benefits and risks involved.
What is margin trading?
Margin trading is a form of borrowing that lets you leverage trading positions using the funds provided by a third party. Accessing a greater trading capital will raise the portfolio for greater exposure; in return, traders can realize tremendous profits on every successful trade. This is not possible in spot trading. The margin or leverage trading is more common in low-volatility markets.
In traditional trading exchange, the leveraged funds are provided by the investment broker itself. Still, in cryptocurrency trading, one can rely on other traders, but a few crypto exchanges provide trade leverage funds by themselves.
We provide funds to leverage for all the registered traders; there is no need to look out for any third-party traders.
The margin trading is not designed for any specific investors; it can be used by any type of investor looking for additional leverage in their investment.
Now, let’s look into basic terminologies that one should be familiar with before understanding how margin trading works.
You should have seen, I have mentioned the terms like margin and leverage. Let see the commonality and difference between them.
Leverage: The amount of funds you borrow from exchange to increase portfolio exposure is called leverage. In Trade herald, a trader can use up to 100x leverage to increase profit from a trade.
Margin: The amount required to gain access to the leveraged amount.
Initial Margin: The minimum amount required to open a trade with leverage. A trader can deposit just $100 worth BTC to leverage trade up to 100x.
Depending on the leverage value, the amount you need to deposit as initial margin changes. Higher the leverage, lower the margin required.
Maintenance Margin: This is the minimum required to keep a position open by an investor while trading. Without maintenance margin, the exchange will trigger margin call – the moment where the investor either needs to deposit additional funds into their account or the trade position gets liquidated by deleveraging.
How does cryptocurrency margin trading work?
Trade Herald crypto exchange offers perpetual contracts. It is similar to futures contracts, but the only difference is there is no expiration date for the contract. One of the advantages of our contract is that a trader can get 100:1 leverage. It is commonly referred to as 100x leverage.
When margin trading is initiated, the trader will have to make a marginal deposit of a certain amount predetermined by the exchange to borrow funds.
For example, to open a position of $10,000, and avail of 100x leverage, the trader has to commit $100 worth BTC as a capital.
Margin trading can be used for both long and short positions. A long position is where a trader buys and owns the value of an asset and waits for the price to go up to sell it. On the contrary, a short position is where a trader sells the asset, which he doesn’t even own. It means the trader sells the asset, hoping that it will go down and buy back the asset at a lower cost.
It is imperative to clearly understand this concept before you open a long or short trade position with margin. It is because the exchange holds the right to sell your trade position if the market moves against the position. By then, the marginal call is initiated, you can either additional deposit funds to reach the minimum maintenance margin to safeguard your position, or the exchange will liquidate your position automatically to cover their losses.
A margin call will only be initiated if your maintenance margin is as required to hold a position open.
Advantages and disadvantages of margin trading:
One of the most obvious advantages for a trader is that with the right trade strategy, he can gain exponentially more than traditional trading methods. Another advantage is a trader can diversify his/her portfolio with multiple trades with relatively large sums of money to their accounts.
Margin trading is not immune to disadvantages; it involves more risks than regular trading. Just like, you can gain more profit, you may lose much without a proper understanding of the market and risk management strategy.
One of the common trade strategies to shield oneself from high-risk is to tools like stop orders, limit orders, and stop-limit orders, as and when required.
Margin trading certainly helps to amplify profit and diversify the trade portfolio. You must be able to analyze the charts, identify the trends, assess, and provide entry and exit points of the trade by anticipating risks effectively.
It’s highly recommended to be practiced enough to acquire extensive spot trading experience and learn technical analysis before you proceed to leverage trading. As mentioned above, leveraging trade involves risk. When it comes to crypto margin trading, the risk is even higher, so risk mitigating tools to protect yourself from heavy losses and keep your trade under control. To hand in more profit to the traders, traders can avail commission-free trading all crypto leverage trading from Trade Herald.