What is Margin Trading?

Margin trading is a method that allows users to trade assets (in this case, cryptocurrency) using money “borrowed” from a third party. In a nutshell, it allows traders to trade with more funds then they have in their wallet. This is called leverage. By utilising leverage, a trader can see higher returns on a winning trade then they would if they were to just use their own funds.

For example: on a 10x leverage, if a trader would trade with £10,000 worth of crypto, while only using £1000 of their own balance. Each trading platforms will have their own rules and max leverages that a trader can use. In the case of crypto, leverages of up to 100x can be used, meaning a trader with £1000 in their account can trade £100,000 worth of assets.

A trader can use leverage for both long and short position (read our tutorial on longing and shorting for more info), to try and make higher returns. But, while trading with leverage, the capital the trader has used for the position (in our example £1,000) can be used as collateral if the trade goes the opposite way in which the trader has predicted. This is called liquidation.

Liquidation occurs when a trader has made a wrong call and the price of the asset goes the opposite way to what the trader has predicted. When the order is active, the trade will have a liquidation price set for that position. The bigger the leverage, the closer the liquidation price is to the price the trader paid for the asset. Liquidation can be avoided with the use of stop-loss targets. The stop loss will close your order at a price you set, which will save you a lot of money and ultimately stop your capital from being taken due to liquidation. Although stop losses are important, in a volatile market, they may not always work if they are set too close to your liquidation price.

The advantage to leveraged positions straight forward, if the trader makes the correct call and the price moves in the direction the trader has predicted, profit can be much higher. The disadvantage is being the opposite, traders can lose a sizable chunk of their capital if price was to go the opposite to predicted. WARNING: Cryptocurrencies are more volatile than typical trading assets, so using leverage can be risky. Traders need to know what they are doing before diving in to high leverages. Be sure to read our tutorials on how to trade before using high leverages.

1 comment

Leave a Reply

Your email address will not be published. Required fields are marked *