What are the Risks Involved with Margin Trading and How to Trade With Leverage Properly?by Jhorton Jennifer Marketing Consultant
The trend of leveraged crypto margin trading has set new heights consistently in the year 2021. Through April, the prices of cryptocurrencies were higher which meant huge profits for the traders. But soon the prices dropped back down again, it was a completely different story.
Leveraging money is inherently risky, no matter how the market appears to be trending, or how talented you are. So, it’s important for you to understand all about BitMEX margin trading and what are the risks involved with it.
What is margin trading?
Margin trading is all about trading on the borrowed or leveraged money. In order to get a loan, you need the margin or collateral first. It is like a deposit which is controlled by your exchange until you repay the loan amount. Then as per the rules of crypto exchange, you can borrow some multiples of the amount of capital that you’ve locked in. it is the ratio of what you have put in versus what you take out is known as leverage.
To open leveraged trading on the traditional market, the traders have to interact with the brokers. In the cryptocurrency field, things like margin trading are quite easier. Anyone can take advantage of the centralized or decentralized platforms lending leverage, and make the process simpler. With leverage trading, potential profits are much higher and at the same time, there are chances that potential losses are also much greater.
How does margin trading work?
Leverage trading for Bitcoin or any other cryptocurrency essentially lets the traders amplify their potential profits by giving them leverage between 5x up to 100x the amount required. BitMEX is one of the best platforms that offer trading with leverage to traders for different cryptocurrencies.
Margin trading positions are divided into two different categories where one is long and the other one is short. For a long trade, the trader buys an asset at a low price with the hope of selling it at a higher price. And, on the other side, the short position is exactly the opposite of this. A trader buys an asset and sells it in hope to buy it back at a lower price.
In both of these cases, the trader earns profit from the difference in the price of the crypto asset at the moment of opening or closing any position.
Let’s understand this with an example:
If you wanted to invest $10,000 in any crypto asset say Bitcoin at a leverage ratio of 1:10, making the margin 10%, you would only need to invest $1,000.
With unleveraged crypto trading, you would need to invest $10,000; that’s a considerable amount more. However, if the price of Bitcoin goes up, your profit margin is exactly the same.
In other words, with leverage trading Bitcoin, much less capital is required upfront to make the exact same profit. Of course, it is worth bearing in mind that the reverse is also true if the price for Bitcoin were to go down.
If you expect Bitcoin’s value will rise in the near future. To benefit from this, you open a long position with 10x leverage and a margin of $1,000. Your position will then amount to $10,000. A 10% rise in the price of BTC will yield $1,000 in profits (minus any associated fees).
The return on equity (ROE) of the position — the amount of profit versus the margin — will be 100%. Without leverage, your profit would only be $100 at an ROE of 10%.
Isolated Margin and Cross Margin
BitMEX employs two different methods of margin trading:
· Cross Margin
· Isolated Margin
On the exchange platform, you can switch between one, and the other by adjusting the leverage slider on the ‘your position’ box located on the left-hand side of your trading section.
You can use cross leverage by moving the slider to the left and you may use isolated leverage for the remaining numbers shown as (2x, 3x, 5x, etc.)
Keep in mind that the isolated leverage doesn’t multiply your position automatically. Once you move the slider, it will adjust how much margin you can use. So, you need to change the quantity manually.
Let’s understand it with an example:
Say, your trading account on the exchange contains $1000, and you move the slider to 3x which further means you can trade with $3000.
But in the case of cross margin, you need not worry about moving the slider. It will use all the funds available in your account automatically.
Example for cross margin:
Suppose your account contains $1000, and you want to use the 3X leverage. All you need to do is to put the input as $3000 in the quantity box, and your account is automatically set at 3X leverage. And, if you want 5X on your leverage, simply input $5,000.
By using, cross margin, you are eliminating the task of entering the leverage manually. However, if you do not want to use your entire balance, isolated margin could be the right choice for you.
We all like profits! Isn’t it? But what if the market moves in the opposite direction of what you expected while putting leverage?
Well, if the position starts to take a ride in the opposite side, and you are verging on not being able to pay back the loan, your exchange will do what they need to protect their money. All that means liquidating.
This means that the exchange will automatically sell one or all of your positions so as to ensure that the margin is repaid in full. Let’s understand it with an example:
Imagine that you have opened a long position with $10000 with 10x leverage. But suddenly the price of the asset plunges 10%. This would be putting you down $1000, the value of margin, if the price of the asset still falls and comes below the margin. Now, it’s no longer your money, but there is exchange money that is on the hook. This is where the liquidation mechanism comes in. Before you run out of margin, the exchange will automatically close your long position. That means, it sells the asset at the market price, recouping the loan as well as liquidation fee.
The greater the leverage, the closer will be the liquidation price to the market price. For this reason, it is always recommended to open positions with leverage no higher than 5x.
Is margin trading worth it?
Margin trading can be done by the traders looking for a quick way to increase their buying power. It is something which may give you greater ROI if done smartly, and lets you buy bigger stocks. But if done wrong, it may leave you in trouble.
The main risks associated with margin trading are:
· Greater than usual losses in proportion to the leveraged amount
· Potential for unlimited losses through short selling
· Through liquidation, higher chances of complete loss of funds
Margin trading requires risk management. Allocate a small amount of your capital to different trading pairs. Apart from this, your amount of leverage should be chosen based on where you want to trailing stop loss prior to opening any position.
Strategies for margin trading
Some of the popular margin trading strategies that you can consider are:
· Increase trade size gradually
· Practice trading with demo trading
· Divide your position
· Define your goals and minimize risks
· Limit the time of trade to limit the risk of unforeseen price drops
If you want to trade with leverage, TrailingCrypto will be the right tool for you. With TrailingCrypto, you will receive one of the most accurate trading signals in the market to improve your trading strategy while using BitMEX. Check it out and don’t miss a trade anymore.
Created on Jan 11th 2022 05:19. Viewed 219 times.