Everything You Should Know About Margin Trading

2021/06/16 00:50:29

There are several ways that a person can get started with trading cryptocurrencies. If you are an agile trader, you may have heard about concepts like shorting Bitcoin, margin trading, or trading with leverage.

Unlike what most new traders believe, crypto margin trading is not as complicated as it sounds. The crypto market is known for its high volatility caused by price fluctuations. However, the volatility makes it very difficult for traders to turn around quick profits because prices can lower unexpectedly. However, through margin trading, the price fluctuations present an ideal opportunity for traders to turn a profit.

What is Margin Trading?

The world of margin trading can be quite complicated for newcomers to the trading world. The concept used to be common in markets with low volatility and slow activities, such as the forex market. However, it has recently shifted to the cryptocurrency market.

However, the basic concepts of crypto margin trading are easy to understand if you go straight to the leverage trading activities. In simple terms, a crypto margin trade enables the trader to borrow capital and increase their high buying power. They can then open a bigger position than they could with their actual account holdings.

A trader will get more exposure to various assets through margin trading by borrowing capital on the crypto exchange. This is different from normal trading, where a trader deposits their capital to the exchange for trading activities. In contrast, margin trading enables traders to increase the capital they can trade with beyond what they have.

When researching margin trading, the term leverage trading often pops up. Leverage is the factor by which a trader will multiply their position. For example, if a trader opens a trading position with 100X leverage, their exposure and gains will be multiplied by 100 times.

Margin trading looks very attractive on paper at first. Increasing profit potential by 100 times looks like a great deal to any trader. However, there is a downside. Using crypto margin trading also increases your risk by close to the same amount.

An Example of Margin Trading

Let us assume that Bob invests $25 on a crypto exchange and leverage with a 4:1 ratio. The exchange will allow him to borrow $75 extra, so he will have a total of $100 to make his trade. When Bob agrees to this, it means that he will have to pay back the $75 lent to him plus any other fees regardless of him profiting or losing money in the process.

However, exchanges also have mechanisms in place to guarantee that Bob repays the money he borrowed. The exchange will “call in” his margin trade when the asset’s price starts declining to a point where he starts losing the money lent to him. If Bob wants to avoid a margin call, he can invest more of his money in his trading position.

Exchanges have multiple leveraging positions to choose from, including shorting, where the trader bets on a cryptocurrency to lose its value.

Benefits of Margin Trading

Margin Trading carries a higher level of risk than normal trading, especially when it comes to cryptocurrencies. Crypto markets are very volatile, which means that margin traders need to be careful when taking their positions. For this reason, margin trading is not recommended to new traders because it requires advanced hedging and risk management strategies.

However, this does not mean that margin trading does not have its benefits. Through this strategy, a trader can open a position that exposes them to more profits than they would normally gain with their original assets. As mentioned earlier, a successful trading position at a 100X leverage will give the trader 100 times more profits than what they would have earned in normal trade.

Margin Risks

Margin trading is a highly risky venture. There are several risks that need to be considered before taking a position. The first one is that the crypto market is largely unregulated in comparison to traditional markers. This exposes the market to price manipulation, especially in crypto margin trading.

Market movers are traders who can influence the crypto market because of large capital holdings. They can take a position that can affect margin trade positions, exposing everyone, especially margin traders, to a high level of risk.

A trader with high leverage in crypto positions operates in a shorter liquidation window. One needs to calculate potential price movements that would cause the liquidation of a trading position. However, several tools can help calculate this risk.

Tips for Managing Risk

Some tips that traders use to reduce the level of risk associated with margin trading include:

Traders should start with a small trading position with lower leverage. They can increase their trading size with time as they understand the market and the position itself.

It is advisable to start with demo trading. A demo trade creates a fake trading ecosystem that will allow new traders to gain insight into trading activities and gain new trading strategies.

Traders can minimize their risk by spreading their position. Having multiple profit-taking levels will allow them to grow their chances of making profits.

Evaluating interest and fees. When repaying the borrowed amount, traders need to include interest as well. Taking interest into account before borrowing funds is always a good strategy.

Always looking out for how external factors influence the crypto market gives traders a clear idea of which position to take. Hence, they try to track any regulatory changes, market performance, and other factors that may influence prices.

KuCoin has launched its margin trading products in 2019, where users can trade cryptocurrencies like Bitcoin. Ethereum, Litecoin, KCS and other cryptocurrencies with up to 10X leverage. Users will enjoy a discount in trading fees if they use KCS to pay the trading fees. Head over to KuCoin margin trading to give it a try today!