During our career as traders, whether short or long, we have all heard success stories of traders who went from poor to rich in one trade! Isn’t that true!
Well, it’s not necessarily wrong, but it’s not related to their trading skills but to the leverage that they used to its maximum and misused.
As you can see, today we are going to discuss the subject of margin trading, its dangers and its advantages. Let’s get started!
Disclaimer: Our content is intended to be used and must be used for informational purposes only. It is very important to do your own research and analysis before making any investment based on your personal circumstances.
What is Margin Trading and Leverage?
Simply put, margin trading means that you can open a position greater than your capital by “borrowing” money from the exchange you trade on . Let’s say you have $10,000 in capital and you decide to open a position of $20,000, then you would be said to be using a leverage of 2.
On most platforms, you can use leverage up to more than 100 but we wouldn’t advise using leverage if you are a beginner. We recommend learning more about leverage before using it. Even when you are ready to use leverage, be sure to take it slow and only use a small amount when starting.
Margin trading and leverage are tools that should be used with extreme care to increase the number of positions you can open simultaneously while keeping the risk level constant.
Using it to take a position 100 times larger than your capital is absolutely not the right way to use it. Remember that there are no shortcuts in trading, so avoid any get rich quick schemes!
Is it a good idea to trade with leverage?
Taking huge positions using extremely high leverage is the best way to destroy your trading account, that’s a fact.
On the other hand, using high leverage while maintaining a constant level of risk per trade, between 0.5% and 2% maximum, is an excellent idea. This is because it allows you to open a position without using too much capital and therefore opening several positions simultaneously becomes possible while keeping the same degree of exposure.
The importance of Risk Management
We’ve already covered this topic in other articles, but that’s because it really is the cornerstone of your trading success, along with controlling your emotions. Using high leverage without stop-loss for example would be totally suicidal for your balance.
When you open a crypto margin trading position, you’ll be given the choice of “going short” or “going long”. A long position means that the trader thinks the price of the coin will rise and shorting means the opposite. In the event that you open a trade and the market trend moves against you, it is very likely that the exchange will ask for more collateral or even forcibly close the position.
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Advantages and disadvantages of margin trading
- You don’t have to commit all your capital
- Open multiple positions simultaneously
- Allows you to multiply your profits (if used with caution)
- Allows you to short an asset (not recommended for beginners)
- Relatively low transaction fees
- Can destroy your account if misused
- Has funding fees (because we lend you money)
- Success is very much linked to your risk management skills (so your experience)
Is margin trading for you? That’s the question that can only be answered by you. As a general practice, if you aren’t confident to take on margin trades, it probably isn’t for you. Is there another way to gain profits in the cryptocurrency market, you might ask?
The 4C-Trading SMART Bots automate crypto trading 24/7/365 on your behalf so you don’t need to do it manually. They are perfect for the time starved investors and traders of all levels! In fact, we offer a 7-Day Free Trial so that you can test them out before getting onboard.