A friend of mine who I had gotten into trading crypto had recently asked me what margin trading is and how to margin trade. Those questions are what led me to writing up this post.
So what exactly is margin trading? In a nutshell you can think of it as borrowing money to increase your position size. Why would anyone want to borrow money to buy? Well, it essentially multiplies your gains. Let's look at a couple of examples to demonstrate this.
Scenario 1
You buy 1 Ethereum for $100 and the price then goes up to $200 and sell it all. You've just made $100 (100%) on your investment.
Now if you had borrowed that money and traded it on margin, your gain percentage would have been higher than 100%.
Scenario 2
You borrowed $50 from the exchange and put in your own $50 (for a total of $100). You then buy the 1 Ethereum at $100. The price pumps to $200 and sell it all. This time, your gains are 200%. How? You only put in $50 of your own money and made $100 ($200 minus the $50 loan and your initial $50).
Just as I had demonstrated above, margin trading can be quite lucrative. However, it's not without risk though. Just as your gains can be magnified, so can your losses; if you can double your gains, you can also double your losses. In addition to that, you can even get liquidated or margin called. This is when the value of your position falls below the amount you've borrowed. The exchange would automatically sell whatever position you're in to cover your borrowed amount.
Scenario 3
You borrowed $50 from the exchange and put in your own $50 (for a total of $100). You then buy the 1 Ethereum at $100. The price dumps down to $50. At this point, you will get liquidated/margin called to cover the $50 that you've borrowed. The exchange will sell that 1 Ethereum at $50 and your debt has been repaid automatically leaving you with nothing. This essentially means that you've lost 100% of your money. You put in $50, and came out with $0.
So pretty much that's what margin trading is. For simplicity, I've left out other factors such as margin interest, and trade fees. Those also need to be taken into consideration when margin trading.
Now in terms of how to margin trade, specifically on Binance, here's a short 4 minute video on how to do so. It can be a lengthy process which is why I made the video. As a note, not all exchanges offer margin trading and if they do, the process may be different from that of Binance's.
I hope that this post was able to help you better understand what margin trading is, why people margin trade, the risks associated with it, and how to actually margin trade on Binance.
If you don't already have a Binance account and would like to get started with one, here's a link to help you save 10% on your trade fees:
SAVE 10% ON TRADE FEES ON BINANCE
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