The amount of profit in successful cryptocurrency trading directly depends on the size of the trader's capital. The higher it is, the more revenue in profitable trades. What if there is very little money, and you want to earn a lot? This is the moment when the concept of margin trading comes to aid if there is such an opportunity. Let's find out how it works and what risks it carries.
Margin trading - what it is?
Imagine the situation: you have opened an account on the cryptocurrency exchange for the amount of 100 dollars. You assume that in the near future the price of a certain cryptocurrency will rise and buy it. Let's say the forecast was justified, and the cost increased by 10%. In a normal situation, your profit from the transaction will be 10 dollars. In margin trading of cryptocurrency, it can be higher in 2, 3, 5, and even 10 times. Let's understand the mechanism of trading with leverage.
The essence of such currency speculation is the use of borrowed funds. Leverage is marked by two digits that show the ratio of own and credit money. So, leverage 1:1 says that the trader trades on his own funds. Leverage 1:10 means that a person disposes of in a trade amount exceeding personal capital by 10 times.
According to this Oinvest review leverage is essential when a person first starts trading. You should be careful with choosing it, as it could end up being a double-edged sword.
Now we will calculate how much the trader will earn in margin trading of cryptocurrency. With the leverage of 1:10, 100 dollars in the account turn into 1000. Accordingly, an increase in the value of the asset by 10% will bring the trader already 100 dollars in profit, which is 10 times more than in the previous case. What happens if the price of the cryptocurrency goes down?
If the trader manages only his own funds, the price reduction by 10% will bring him 10 dollars of loss. In credit money trading, the situation is changing dramatically.
You can use borrowed capital only on the mortgage of your own. For example, you trade with leverage 1:10. You have open trades, but the price goes in the opposite direction. When the loss reaches the size of the personal capital, the orders will be closed on a stop-out. The trader will lose his own funds and the credit will be returned to the lender.
Trading on your money is less profitable but more secure.
How to reduce risks?
Margin trading of cryptocurrency increases not only the income of the trader in profitable transactions. Risks increase in the same proportions. To minimize them, you need to follow simple rules.
Use stop orders
Do not wait until the account is completely zeroed if the price went wrong. It is necessary to calculate in advance the possible options - to set a stop-loss and take-profit so that when reaching a certain threshold of losses (profits) the trades automatically closed. Why would you do that?
The main reason why traders drain their capital is the lack of a trading plan, trading on intuition. It is better to calculate in advance the levels of prices, when reaching which there is no sense to hold a loss-making position, and at this place to put a stop-loss. The deal closes and you save your money.
Limit the size of the leverage
Margin trading of cryptocurrency brings 5 or 10 times more profit - this is a plus. Unfortunately, the losses in negative transactions increase by exactly the same number of times. For your trading to remain profitable in the end, orders that close with a positive result should be much more unprofitable. If you can't yet boast of a stable trading strategy, don't trade with leverage, more than 1:3.
Pay attention to the numbers
For the possibility of using margin trading on the exchange of cryptocurrencies, you need to pay. Interest is accrued for each day of use of credit funds. Before you take out the loan, calculate your benefit.
