What are the risks associated With Margin Trading? How Do I Trade with leverage Effectively?
The trend of leveraged cryptocurrency margin trading has set new records consistently throughout 2021. The crypto market was very high in April, resulting in huge profits for traders. But soon the prices dropped back down again, it was a completely different scenario. Learn more?
However well you know the market or the skills you have it is still risky. So, it’s important to be aware about margin trading and what are the risks involved.
What is margin trading?
Margin trading is all about trading on borrowed or leveraged funds. To get a loan, you need the collateral or margin first. This is a deposit that is held by an exchange until you pay back the loan. As per the regulations of the crypto exchange you are able to borrow multiples of the amount of capital that you have locked in. Leverage is the proportion of what you put into your account and the amount you take out.
To allow leveraged trading on the market that is traditional, the traders must communicate with brokers. Margin trading is easier when it comes to cryptocurrency. Platforms that provide leverage can be utilized by anyone and make the process simpler. Leverage trading may result in increased profits, but higher losses.
How does margin trading operate?
Leverage trading using Bitcoin or other cryptocurrencies allows traders to boost their profits by up to 100x. BitMEX is one of the best platforms to offer trading with leverage for traders for different cryptocurrencies.
Margin trading transactions are classified into two different categories where one is long while the other is short. When a trade is long, the trader buys an asset at a lower cost in the hope of selling it at a higher cost. On the other side, the short position is exactly the opposite of this. The seller sells the asset with the intention of buying it back later for an affordable price.
In both of these cases, the trader earns profit from the difference in the price of the crypto asset at the time of either closing or opening a position.
Let’s get this figured out with an example:
You’d need to invest just $1,000 to invest in a cryptocurrency, such as Bitcoin and Ethereum, with 1:10 leverage and an incline of 10 percent.
For a non-leveraged cryptocurrency trading account, you’ll have to put in $10,000; that’s a considerable amount of money. However, if the price of Bitcoin rises your profit margin remains identical.
With leveraged trading Bitcoin is less capital is needed to earn the same amount of profit. It is important to remember that the opposite is also true, if Bitcoin’s price were to fall.
If you expect Bitcoin’s value will increase within the next few months. To profit from this, you can open long positions with 10x leverage and a margin of $1000. The amount of your position will increase to $10,000. Profits of $1,000 will result from a 10% rise in BTC price (minus the fees associated with it).
Return on Equity (ROE) is 100 percent. Your profit at a ROE of 10 percent is only $100 without leverage. Isolated Margin and Cross Margin
BitMEX has two distinct ways of trading margins:
Cross Margin
Isolated Margin
On the platform for exchange, you are able to toggle between one option and the other, by adjusting the slider for leverage on the ‘your position’ box located on the left-hand part of your trading section.
You can use cross leverage by shifting the slider left, and you may use an isolated leverage option for the remaining numbers listed as (2x 3x, 5x, 2x, etc.)
Make sure to keep in mind that the isolated leverage doesn’t increase your position automatically. As you move the slider it will alter how much space is available. This means that you have to
Edit the amount manually