Today we are going to tackle a rather interesting subject – margin trading and leverage. It can be dangerous for those who do not understand to master. We have heard someone praising the merits of using leverage in trading and the profits made versus the small initial capital. In reality, it is quite different!
What is Margin Trading and Leverage?
Simply put, margin trading, which is common in the forex and crypto markets, consists of trading a position with only a portion of the required capital.
Leverage is a mechanism to amplify the trader’s investment capacity. It is the use of borrowed funds to increase one’s trading’s position beyond what would be available from their cash balance alone. Leverage allows the trader to make larger trades, which can exceed the initial capital, both when buying and selling.
We will most often use a leverage effect of 10 or 20 maximum, which remains rather conservative.With such a leverage, a trader with a capital of $1000 will be able to open a position of $10,000 with a leverage of 10 and $20,000 with a leverage of 20.
In order to be able to open a leveraged position, you will need an initial margin which will depend on your chosen leverage. On the FTX trading platform, for example, you can choose a leverage of up to over 100, but we will assume a reasonable leverage of 20.
On this assumption, your initial margin will be 5% to open a position, so you will need 1/20 of your position size in capital. This is true for small positions – once you start to open larger positions you will need to take into account your “initial margin fraction” and your maximum leverage will be calculated as follows:
Minimum between (1 / “initial margin fraction” | account leverage)
What is a Maintenance Margin?
The initial margin level is not the only variable to consider when trading with leverage. You must also consider the maintenance margin required to keep your position open.
The maintenance margin level is the amount of equity that a client must maintain in order to keep an open position. Insufficient funds to meet the maintenance margin requirement will result in the closure of all or some of your positions.
On FTX, this depends on the level of leverage you choose, 3% for leverage up to 20 and 0.6% for higher leverage.
What are the differences with Spot Trading?
The biggest difference between leveraged trading and spot trading is that with spot trading, you cannot open a position larger than the size of your capital. This limits the possible gains, which may affect the experienced traders yet it reduces the risk of loss for beginners.
The second difference is that with margin trading, you have to pay additional commissions such as funding, which is the “cost” of your loan.
Which one to use?
Margin trading is ideal for experienced short-term traders, but is not recommended for those who do not have the necessary training. Due to the additional costs, it is not suitable for a long-term investment.
Spot trading, on the other hand, is well suited for long-term investment because once you have paid the transaction fee for entering a position, you can hold your position without any additional fees for as long as you wish, in accordance with your investment goal.
Spot trading is also more suitable for beginners because it is easier to control your risk level.
How to be ready to trade with leverage?
There are many facets to learning how to trade but we always come back to the most important point and that is psychology.
You need to know technical analysis and how to determine the trend of a market for sure, but the main thing is risk management.
Indeed, as we already mentioned in previous articles, risk management is what will allow you to succeed in the financial markets by protecting your capital from losing trades (there will be some, believe us!).
The best way to approach margin trading with peace of mind is to be trained by a team of experienced traders, such as 4C Learning.
How will you benefit from 4C Learning?
The Pro Crypto Trading Bootcamp by 4C Learning covers tried and tested trading knowledge from a team of expert traders with decades of experience. It’s a bootcamp that allows you to learn at your own pace – you can pick and choose which area to start with based on your goals or prior experience. You can also refer back to our lessons whenever you face challenges.
What will you learn?
4C Learning was started with one objective in mind – to empower traders with the core skills to succeed and be profitable. While short term gains are crucial to traders, we believe that to play the long game, it is important to hone your skills in the building blocks of trading.
The courses are designed to help you achieve the sole objective in trading – to succeed and be profitable. Go from novice to pro traders and unlock your full potential with these trading fundamentals from 4C Learning:
- Risk Management
- Determining Directions
- Support and Resistance
- Candlestick Reading and Patterns
- Price Action
- MACD and Bollinger Bands
- Fibonacci Basics Until Advanced
- Build your own strategy
Ready to start investing in yourself and trade like a pro? Your journey to succeed at trading and stay profitable starts at 4C Learning! Register and sign up and we’ll see you in class, pronto! 😉
Earn while you learn!
Learning a core skill is all good and essential but let’s face it – the reality of life can be harsh. How do you cover your daily expenses while going through the 4C Learning Pro Crypto Trading Bootcamp?
We’ve got your back! While honing your trading skills and learning from our expert team of traders, you can earn a passive side income from the 4C-Trading Affiliate Program. With a past performance record of +1000% accumulated by the SMART BTC, ETH and LINK Bots, not only will you be earning a passive side income from our affiliate program, you’ll be part of the movement to empower others to gain financial freedom.
Our mission at 4C Trading is to provide traders and investors with a holistic approach to embark on the adventure of cryptocurrency. We do this by providing you with tangible tools to help you make money along the way while learning core skills to succeed and stay profitable in the long term!
The automated 4C SMART Bots help you earn and grow your portfolio stably over time while the Margin Signals allow you to practise and test what you’ve learned from 4C Learning.To sustain you financially along the way, we started the 4C-Trading Affiliate Program to help you earn while you grow!
Ready to take full control over your life and take that leap towards financial freedom?
Here are the ways you can join us on this crypto adventure:
- Earn and grow your portfolio stably over time with the 4C automated trading bots.
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*The free trial includes access to all three SMART Bots (BTC, ETH and LINK) and Margin Signals*
- Earn an extra stream of revenue with the 4C-Trading Affiliate Program.
Sign up to be a 4C Affiliate 👉https://affiliate.4c-trading.com
- Start investing in yourself and go from novice to pro traders with 4C Learning.
Sign up for Pro Crypto Trading Bootcamp 👉https://education.4c-trading.com/
We are excited to have you join us in the 4C family where we help one another continue to earn and grow on this exciting journey!😎