Margin Trading: Trading with Risks and Leverage of Cryptocurrency

• Margin trading allows users to borrow unaffordable cryptocurrency and trade with existing capital.
• It’s a leveraged trading technique that helps to maximize gains in volatile trading swings.

Margin trading manipulates a large amount of crypto with existing small capital. It helps in amplifying gains but also increases the risk of volatility. By putting an asset as collateral, perpetual futures are used to increase the gain level. This architecture allows you to trade over the asset’s value rather than the actual asset. Strict risk management and confident trading ability can leverage a user by harnessing great returns in a trading journey.

What Is Margin Trading?

This trading strategy allows traders to trade long positions more than existing or low capital available in their accounts. Buying power is enhanced via exchange or brokerage along with providing additional capital to a trader. Bigger positions help traders to make huge profits and losses also with margin trading. 

The borrowed amount is returned after the trade is made, while traders can have leverage of their full benefits. Multiple exchanges offer different margins, while some exchanges allow trading accounts to have positions much more than total capital. This strategy is quite risky sometimes because trading with such high leverage is often liquidated, causing traders to lose their total existing funds.

The margin determines the needed value to trade on a leveraged position. This could further split into two parts:

Long position: In this position, traders bet on prices going up.

Short position: Trading or betting on the price going down.

How Does It Work?

Margin trading allows a user to borrow a particular amount from the exchange to trade over a bigger position. In this, a trader needs to post collateral worth an amount or percentage of the order’s total value. This collateral is determined as a margin. Margin trading accounts and leverages are correlated where leverage determines the ratio of the collateral amount to the borrowed amount. 

Gaining huge profits on behalf of borrowed amounts sounds great, but it’s essential to acknowledge the inherent risks. High volatility characterizes margin trading, demanding strict risk management protocols and a proven track record before beginners delve into this strategy.

Leverage and Liquidation

Leveraged trading can provide several advantages, as it allows you to trade bigger positions with small capital. However, it proves to be a major disadvantage if a user doesn’t have much knowledge about this trading strategy. This could lead to greater risk if it’s done without proper management. A sudden price surge can leave a trader with a huge loss without any profitable output.

On the other hand, Liquidation defines the value of the total number of positions in a margin account. It includes deposited cash and the open market value of long and short positions. If the liquidation margin becomes low, traders may face margin calls via brokers who then liquidate such open positions.

Security margin helps a trader to acquire more shares than they can afford via an existing cash basis. The rise in stock prices offers high earnings as an investor acquires more shares. But, when the price falls, traders face higher losses than investments made earlier.

Conclusion

Margin trading helps to amplify the level of gains along with potential profits in a user’s favor. It allows you to short assets which is not possible in spot trading. Well-planned trading opens the doorway to huge benefits, but one can’t ignore the significant risk that comes along with this trading technique. Using stop-loss helps you to set the price where you want to exit the position by exchange. It can be a great tool if used properly.