“The volatility of the crypto market is feared by all but this volatility can be used as a weapon to earn quick profits with the help of margin trading. Since margin trading can backfire and hurt the trader himself, caution must be used before loading your barrels.”
Margin Trading and Its Basics
Though it seems to be complex to new traders, it is a simple concept in which the trader can borrow capital from the trading exchange and enhance his buying power. Increase in the buying power provides the potential of earning higher profit in the volatile market where prices can go up quickly. The borrowing is known as the leverage and the amount that is being deposited by the trader is known as the margin. The leverage is always measured in terms of ‘times the margin’. For example, 2x, 3x, 50x and even more can be leveraged from the margin amount if the exchange permits.
An Example of Margin trading
Alice has done extensive research about a cryptocurrency and expects its price to rise in the near future. But, Alice only has $100 to invest which will provide her $50 profit if the currency value increased by 50%. Alice decides to have a 10x leverage from the exchange that she uses for trading. Now, she gets 10 times the amount ($1000) she has to buy her favorite cryptocurrency which means $100 what she owns and $900 that is provided as leverage (loan) from the exchange. Now if the currency price increased by 50%, her profit will be $500 which is 10 times what she would have reaped without leverage.
This makes margin trading a very lucrative option for the beginners but the problem is that it can act as a double edged sword as if the trade goes against the trader and price falls, the loss will also be in the magnitude of 10 or whatever leverage has been used.
Tips for Success
Though it is not a financial advice and every trader must research thoroughly before investing, there are certain tips that can help you in managing the risks of margin trading in a better way:
- Start with Small Positions Initially: Traders must start with small margin positions and as the knowledge and experience is gained, the positions can be increased gradually.
- Take Minimum Leverage at the Beginning: Traders must use low leverage in the beginning so that chances of losses are minimized and increase leverage afterwards.
- Take Demo: There are a number of trading demo applications that can be used to margin trade and it is advised to use them before jumping into the real deal.
- Set Targets: Always set profit taking targets at different levels to spread the positions into different price ranges thus minimizing the risks of losses. This is a conservative approach, though profits will be less if all the targets are not met but is still better than losses.
- Always Be Updated: You must keep yourself updated with the news surrounding the currency you are investing in, to ensure you are aware of the internal and external environment of the currency and would make better decisions while margin trading.
Disclaimer: The article is meant for the educational purpose only and in no way it should be considered as financial advice. Own research on the topic is advisable.
Photo by – Maxim Hopman on unsplash