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With the inherent volatility of cryptocurrencies, even spot trading—where you simply buy and sell cryptocurrencies—can be thrilling. However, for the experienced trader, the risk to reward ratio could use an increase, which is where margin trading comes in.
Margin trading is an advanced trading strategy that includes borrowing assets from a broker to make an investment. It lets the trader invest much more than they would usually be able to afford—even up to 100 times more, depending on the platform and what they offer—but it is also inherently riskier, as an unsuccessful trade will leave the trader liable for the total amount of the loss. In other words, if you trade at a margin of 50x, you can profit fifty times more than you would without that margin — but if you lose, you lose the entire amount you used for opening the trade.
This crypto trading strategy is most often used on assets with low volatility because it is much easier to predict the price movements and stay profitable. This means that the international forex market sees the most margin trading. However, it is also used when trading stocks, commodities, and even cryptocurrencies.
Some Terms You Should Know
A margin is the percentage of the total order that you, the trader, have to commit.
Leverage is the borrowed money you will be using to make up for the difference between your margin and the order total.
Collateral is the funds you have in your margin account that guarantees to the broker that you will be able to pay off your debt.
A margin call is a demand from your broker to add more funds to your margin account—and if you can’t do that, they can forcefully sell your positions to make up for the difference.
A stop-limit order is a conditional trade that requires you to set a stop, or the start of the specified target price for the trade, a limit, or the outside of the target price of the trade, and a timeframe in which the order is executable. These are used so that your trade is filled precisely when you want it to be, and if the price goes beyond what you’d want (either up or down, depending on your preferences), the trade is canceled. However, sometimes the desired price is never reached, so the order is never fulfilled.
A stop-loss order is quite similar to a stop-limit in that both are very useful tools for leverage trading. A stop-loss order lets you set the limit to which you’re prepared to take a loss. If you set it at 5% and the price of the asset falls for that amount or more, the asset is sold immediately so you only take a 5% loss and not significantly more.
A trailing stop is a type of stop-loss order that can also be used to lock in profits. This is especially useful for anyone who wants to cut away emotion from deciding when to exit a position.
Pros and Cons
The biggest advantage of crypto margin trading is the profit potential it offers. Say, for…