Easy tips on how to start margin trading cryptocurrency
Imagine that you want to take up cryptocurrency trading, but you don’t possess a sufficient amount of money. Seems like a deadlock, right? We’d like to offer you a solution — margin trading. How does it work? Basically, you ask a broker or an exchange for a loan so that your financial capabilities would grow. This way, margin trading is a great way to increase your income!
Sure, we can’t deny that any trading is quite risky, though as we all know scared money makes no money! For this reason, we are going to share the most crucial things about margin trading and then you’ll be able to decide whether to try it or not.
To put it simply, trading cryptocurrencies with the usage of loans or borrowed money is the essence of margin trading. As well as this, the concept includes a possibility to ask a cryptocurrency exchange for lending you an amount of money at quite high rate of interest. Due to this loan, you may get a higher income if the odds are in your favor, though if they are not, you may face some financial losses.
For instance, you’ve chosen a cryptocurrency that will surely pump in your opinion and want to purchase it. However, the amount you can invest is not enough, let’s say $1,000, and you realize that you’d earn much more if you could spend more.
In margin trading it works the following way: you have the aforementioned $1,000 in your account, then you ask the exchange for additional $1,000. Now your balance is $2,000 and you can invest them in the chosen cryptocurrency which may actually help you to earn twice more money if the market behaves as expected.
There are a lot of exchanges with margin trading options, but nfortunately, quite a great number of them are not available for the Americans. The thing is that if the Americans use a trading site, it has to follow the rules established by SEC and that is not an easy task.
There were several trading platforms that wanted to work with the Americans as well, though when 1Broker stopped its existence because of FBI manipulations with its domain, other sites preferred to close registration for the US users in order not to get into the same situation.
First, let’s have a deeper insight into the notion of leverage. Leverage is connected with the increased purchased power that you get when you use margin trading cryptocurrency. The biggest leverage that is possible to receive depends on the exchange and usually looks as a ratio like 2:1 or 15:1.
Supposing an exchange provides a leverage of 5:1, it is possible for you to open a position that is 5 times more expensive than your investment. So, if you have $1,000 on your balance, you can offer a trade of $5,000 maximum. Or if the biggest leverage possible is 30:1, it’s possible for you to create a position that is worth 30 times more than the value of your trading account.
To sum it up, if the market works as expected and the cryptocurrency you’ve invested in pumps, your profit will be increased by the amount of leverage that you’ve chosen. And vice versa — your losses will increase as well in case market behaves unexpectedly badly.
While reading about trading, exchanges and crypto, you might have noticed that the notions margin and leverage are used as synonyms very often. Do they actually refer to the same thing? Let’s find out!
The margin is the amount of money borrowed from a trading site/exchange that helps you to increase your investments. This borrowed money is collateralized by the balance of your account and later you’ll need to give it back to the exchange with interest.
The margin is used to make leverage that is the increased purchase power. Due to the power it is possible to create bigger positions than if you only used your own money. As we said before, the leverage looks like ratio 3:1 or 30:1.
In margin trade you can choose either a short or a long path:
A long path.
Taking a long or a slower path means buying a cryptocurrency and hoping that its value will pump. The main goal is to take the use of leverage in order to have higher profits in case the price actually works as expected and pumps.
A short path.
Taking a short path means selling tokens and believing that their value will decrease. The main goal here is to buy that currency again when the price becomes lower and to take advantage of the spread.
Common cryptocurrency trading is a process of purchasing or selling tokens/coins on a trading platform with the usage of your own money. Basically, you just purchase the chosen cryptocurrency and wait till the price pumps or just increases at least a bit and then sell, either right away or later.
While the main peculiarity of margin trading is that you use a loan given to you by an exchange which provides you with bigger buying power and helps to gain income.
The best thing about margin trading is the fact that you’re provided with an opportunity to have increased profits. As we’ve mentioned, if the market is in your favor, your gains will grow. For instance, if the leverage that you’ve chosen is 10:1, you’ll have a profit that is 10 times bigger. This way of trading is great for those who are experienced in crypto and can foresee all the possible failures as it actually is a very efficient instrument for income increase.
Yes, as any trading, it is accompanied by risks.
Obviously, as it may increase your profits, it may also increase your losses. You need to always remember about that it may deprive you of all the money on your balance, as it is the biggest danger of margin trading.
There is also a policy that should be followed by all traders: it’s necessary to have a minimum amount of money on your balance, for example, 20% of the open position. So, if your balance is lower than needed, you’ll be asked to recharge it in order to avoid the closure of your account. It is known as “margin call”. If you are not able to do it, your order will be closed.
We also want to highlight that taking a loan from an exchange is not free of charge. It’s necessary to pay the borrowed money back and the interest on the amount of the loan. Don’t forget to take a close look at the trading fees of the exchange.
Remember: BOTH profits and losses are increased.
Before the start of margin trading, don’t forget that both losses and profits are not increased. If you’re a beginner or aren’t proficient in trading, the amount of your gains and losses will depend solely on your luck. as you won’t be able to predict the moves of the market. In this case, margin trading is not suitable for you!
Besides, you need to remember that if you want your position to be open, you need to have some percentage of the value of your position. The exchange will close your position if the value is less than needed by the trading site.
Try to follow these pieces of advice when starting or continuing margin trading:
- Evaluate your trading experience. Are you a beginner in trading? Have you read and researched enough about cryptocurrencies? If the answer is no, then you should probably wait until you get enough knowledge. This tool is mostly for proficient traders.
- Don’t hurry. For those who start their margin trading path, it’s better to take small steps: use a lower leverage, for instance, as it’ll help to reduce the risk level.
- Think twice. Using the orders in which you’re 100% sure can actually save you from a lot of problems.
- Do some research in advance. There are exchanges that have a certain criteria for “margin traders”, for instance, an ability to have a certain amount of money on your account or ID verification. Don’t forget to look through these requirements carefully!
Though margin trading is a suitable option for traders that are proficient in crypto, it’s still useful for them to do some research. It’s crucial to look through the requirements of different trading platforms and study their advantages and disadvantages.
Explore new trading opportunities at https://www.bitforex.com/
Published at Sat, 04 Jan 2020 09:24:13 +0000
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