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Margin Trading
What is margin trading in simple terms
Trading on the exchange can take place both at the expense of the trader and at the expense of a loan that can be taken on the platform.
Margin trading is an income generation using borrowed funds. Of course, it may be a loss as well! All depends on your luck.
The general definition may sound as follows:
Margin trading is a type of speculative operations on the stock exchange. It’s aim is to profit from the purchase and subsequent sale of the same asset using credit funds received on the security of personal funds.
The word “margin” (or “advantage”) is used in the financial sector to take into account the difference between homogeneous quantitative indicators: price, interest rate, exchange rate, etc.
By lending to a trader, the exchange does not risk anything. And it is so because the funds that are allocated for the purchase follow a condition of subsequent selling and the simultaneous repayment of the entire loan amount. The funds cannot be spent on other purposes or be withdrawn from a trading account, the platform system has full control over the process. Therefore, the amount of the loan may be several times higher than the collateral one.
Advantages and disadvantages of trading on margin
For markets with low volatility, leverage can be large.
For example, if $1,000 is deposited into a trader’s deposit account, the exchange can lend $1,000,000. The leverage will be 1:1000. In this case, with an increase in the price of the asset by 0.1%, the income from the subsequent sale will be $1000. As a result of the transaction, the amount of income of $1,000 will be added to the deposit amount, and the trader’s account will have a balance of $2,000.
But trading on margin with such a large leverage is a high risk of losing the entire deposit.
If you make a mistake in the calculation and the price of the asset falls by 0.1%, then the loss from the margin transaction of $1000 is deducted from the deposit amount and the balance will be equal to zero.
How is a loan secured by a deposit pledge
On the trading platform, loans are provided on the basis of the Offer Agreement, which describes all the conditions of the loan. Using leverage, the trader agrees to the terms of the exchange. The software keeps track of all the trader’s open positions in real time. If the price of an asset changes in such a way that the loss from an open position increases, and the difference between the deposit and the amount of loss tends to zero, then a situation called Margin Call occurs, and the trader’s position is automatically closed.
Therefore, the size of the leverage for trading with margin should be chosen with thorough control of own risk, so as not to lose all your funds.
The cryptocurrency market is highly volatile. And the leverage here ranges from 1:2 to 1:10. Some exchanges offer loans at a higher ratio, luring inexperienced newbies with the opportunity for a quick income.
What you need to know about crypto margin trading
Margin trading on a crypto exchange has a number of features.
Credit funds can be accommodated not only by the crypto platform, but also by other market participants that seek to receive passive income. They give away their free assets at interest.
In each case, you need to carefully study the terms of the loan.
Understanding margin trading is pivotal for inexperienced traders!
If you are a novice trader and you do not have a clear understanding of how it works yet, it is better to refrain from trading on margin!
Since trading on a crypto-exchange is carried out with an asset delivery, trading with margin is well suited for opening short positions, and it makes no practical sense for long traders.
Experienced traders who want to make money on scalping enter crypto margin trading when there is no pronounced trend. Thus, you can earn income even if the trading pair consolidates in a narrowing sideways corridor.
Conclusion:
Despite the advantage of margin trading, which makes it possible to increase income, the use of leverage has a high risk of losing the deposit. Therefore, the choice of leverage size must be approached carefully in order to avoid a margin call.
