“The biggest issue that all crypto traders face is the availability of more cash to earn more profit when the market is in the trader’s favor and Margin Trading is such a concept that can be a savior in such situations and the killer in the exact opposite situation that is when the market starts to go in the opposite direction than predicted.”
The Concept of Margin Trading
Consider yourself in a situation where you have analyzed the trend of your favorite cryptocurrency and you are certain that it is going to go up but, you only have $100 to invest. The chances of profit earning are limited to the percentage of profit you get on that $100 cash that is available with you. Margin Trading is a concept in which you can leverage (borrow money from the broker or the exchange you are trading with) a certain amount and then trade with that borrowed amount plus the cash you have. In our example if you take a leverage of 10:1 you will be able to trade with 10 times what you actually have. This means you will have $100 cash + $900 leverage taking your total to $1000. Now the profits earned will be in the magnitude of 10x thus profiting the trader and a very nominal fee is charged for the same. Though it is to be understood that the profits that you make are yours but the losses that you make are the profits of the broker you borrowed from and will be charged from your account.
Margin Trading Terminology
It is the prediction that the market price of the cryptocurrency you are trading will go up. If you think that the market price of the crypto will rise you will place a long order.
It is the exact opposite of the Long order and if you think the market price will go down, you will place a short order.
It is the minimum amount that is required to be deposited in order to qualify for the leverage (loan) from the broker. In our example of 10:1 leverage you must deposit 1 part and you will get 9 parts as a loan from the broker.
Leverage is the amount of loan that you can get on a particular cryptocurrency which is calculated in the ratio form. The leverage can be 2x to 50x or even more of the margin amount. Different exchanges provide different leverage amounts for different cryptocurrencies.
Liquidation is the term used for the event that occurs when the initial margin deposited by the investor has been lost during the trading and all the positions that the investor had opened are immediately closed.
Margin Trading: The Good and the Bad
- Margin Trading provides a great option at times of urgent need to get an extremely low interest loan
- The Leverage can be used to multiply the profits many times over without having the cash to do so.
- Can incur losses of the same magnitude as the profits if the market goes against your choice.
- Can lead to complete loss of the available cash that is deposited as a margin amount.
Thus, Margin Trading can be considered as a double edged sword that must be used wisely.
Disclaimer: The article should not be considered as any financial advice. It is advisable to conduct thorough research before investment.
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