Margin Trading is a trading method of leveraged trading through the use of margin. With leverage, you can open a position that is larger than the balance of your account. By “borrowing” capital from the exchange, you can increase your buying power and open a position with a small investment without paying the full amount of what is needed originally.
It is also referred to as leverage trading. “Leverage” refers to the ratio between the position value and the investment needed. In the cryptocurrency markets, the ratios are generally ranging from 2:1 to 100:1, and the trading community often uses the character ‘X’ terminology (2X, 10X, 50X, 100X, etc.) to present the ratio. The higher the leverage used, the more potential the profits can be obtained. For example, a trader who opens a position with 100X leverage will multiply his/her exposure and potential profit by 100 times if predict right.
Trade on margin
A trader needs to invest a deposit to open a position when margin trading. For instance, you open a position using 0.01 BTC (worth$540) with 100X leverage, then your position is now worth 1 BTC (equal to $54,000). The higher leverage a trader uses, the lower margin required.
Going “long” vs. “short”
Cryptocurrency margin trading can be used to open both long and short positions. Long positions mean that traders predict the price of the cryptocurrency will increase, and then they open long/up positions to seek profits. A short position is an opposite. Traders believe that the price will decrease so they open short/down positions to seek profits from the falling price.
The pros and cons of margin trading
Trading with leverage will amplify your profits as well as potential risks. Fortunately, the increase in risk in crypto margin trading is not proportionate to leverage. Simply put, your maximum loss will only be limited to your account balance.
Furthermore, for beginners, it is suggested to learn and practice before diving into the crypto market for its volatility than other markets, especially with margin trading and different leverage ratios. For example, learn to walk before you can run. Users should learn how to set take-profit and stop-loss, which can guarantee their profit and prevent potential loss. Technical analysis is also widely used by many traders when predicting the market.
Margin call & forced liquidation
A margin call occurs when the value of the trader’s margin account is less than the account’s maintenance margin requirement. A trader will need to deposit funds or close some positions to meet the margin call. If the trader fails to cover the margin call, the first position will be liquidated by the exchange so as to the subsequent positions until the margin level is higher than requested.
For example, if you lose 70% of your account value, you need to make a margin call, otherwise, your positions will be closed automatically by the system in the order they are opened. This process is called forced liquidation due to the failure of a margin call.
Bitwells offers you a trading simulator with 10 free BTC to practice your strategies and get familiar with the crypto market before starting margin trading.