When you begin to trade in the crypto world, it’s difficult not to be bombarded with information about margin trading. In the beginning, it can seem like a very risky and intimidating concept.
However, once you get past that initial barrier, you will find out for yourself how powerful and how lucrative it can be. But before you start on your journey of being a successful trader, you need to understand the ins and outs of this type of trading. Here’s what you need to know about margin trading.
What is Margin Trading?
Margin trading is a type of trading where traders are allowed to borrow money from the trading platform to purchase assets with the hope that their price will rise and they can then sell them back to the platform at a profit.
Transactions using borrowed funds are known as short selling, and this will cause a trader’s account to go into debt. If the price of an asset falls, the trader will have to use their own money to pay back what they borrowed.
The act of borrowing is called leverage, which is when you use an amount of money you don’t own in order to control something that is worth more than what you have. In crypto margin trading, leverage can be calculated by taking the number of available assets — for example, if you have 1 ETH and you buy 0.5 ETH worth of assets on a margin trade, your leverage would be 2x.
Reasons Why You Should Trade on Margin
Shading trade on margin is a common practice for retail forex traders. It involves using borrowed funds to trade for longer time periods and bigger positions than would otherwise be possible with one’s own capital.
It’s an attractive option because of its potential to yield higher profits—if the trades are successful, that is. There are also risks involved, though, including the chance of being forced to liquidate positions at unfavorable rates when it becomes clear that one is unable to meet margin calls.
How this works depends largely on the specific broker you’re trading with. In some systems, you choose your leverage and your broker determines how much money will be used for margin requirements—in other words, they shade you in terms of how much margin they require.
If you’re interested in trading on margin, you might be considering using a crypto-specific bot to help with your trades. The benefit of using a bot to trade on margin is that it can make the process much faster and easier than trying to get the job done manually.
Since most crypto exchanges don’t allow automated trading, there’s no way to do this without the help of a bot. But even though a crypto trading bot can be a welcome addition to your tool kit when trading on margin, it’s important to remember that all bots are not created equal.
Cross Margin
Cross margin trading is a system used by investors to increase their trading capital and gain access to more assets. It allows an investor to purchase assets with loans that are often secured by the collateral of other assets.
This method makes it possible for investors to trade up to a larger position of a particular asset than they would be able to otherwise, and is particularly useful for investments whose value has risen dramatically.
Isolated Margin
Isolated margin trading in crypto markets is a great way to hold higher positions on coins you like and make gains in the long term.
Isolated margin trading occurs when a trader sells Bitcoin, ETH, USTC coin or cryptocurrency to liquidate their position and pay off debts. Isolated margin trading occurs on the exchange and is different from the short-selling on other exchanges.
Isolated margin trading is a strategy that uses the concept of leverage to earn more money than traditional trading methods. When you isolate your margin trade, you are not required to keep any funds in an account and you can close your position at any time.
Liquidation
If you are planning to trade cryptos, it is important to understand how liquidation works in margin trading.
Liquidation is a concept that’s sometimes difficult to understand for those new to the world of margin trading, particularly in the crypto markets. Equity traders are used to being taken out of a position when the borrowed funds (the margin) get too close or exceed their account balance. Crypto traders have no such protection—if you’re long and your position moves against you, there’s nothing stopping you from being liquidated out at a loss.
In crypto margin trading, liquidation occurs when your collateral gets sold off at a price below the market value because of excessive losses. This can happen to both new and experienced traders. It’s important to understand what liquidation is so you can protect yourself from it.
How To Mitigate Risks In Margin Trading
- Don’t use borrowed money for long-term investments or for buying cryptocurrencies with a low market cap
- Remember that the profits and losses from your trades are magnified when leveraged
- Never borrow money from a third party for margin trading
- Always set a stop-loss when trading on margin
- Make sure that you’re familiar with your broker’s terms and conditions before signing up
- Consider opening multiple positions of different sizes, especially if you’re using borrowed money
Conclusion
Margin trading is a tool that allows you to trade cryptocurrencies with borrowed funds, and it can be an invaluable tool for those who don’t have the assets necessary to participate in an investment opportunity.
However, margin trading is a risky business, so it’s important to understand how it works and what the risks are before putting your money into a position.