The trade of the bravehearts, crypto margin trading can make or break you in just one single trade. Margin trading refers to a trading strategy where a trader borrows or lends extra funds (over his/her investment capital) to execute the trade. As a margin trader adds more funds to leverage up the trade, the other name of crypto margin trade is crypto trade with leverage. The main attraction that draws in traders towards margin trading systems is the potential of colossal profits. On another hand, you can’t ignore the mammoth losses you might have to encounter in crypto investment if the price drops.
Overview of crypto margin trading
As a crypto margin trader, you will trade with leverage borrowed from a third-party platform, say a crypto margin trading exchange. The allowed range of leverage in crypto margin trading might vary from one exchange to another; some of the top exchanges offer leverage around 10x to even up to 125x. However, you must be careful before signing up for a dramatically high leverage amount while opting for crypto margin trading. While an incredibly high leverage amount can reward you with awe-inspiring profits, it can also plummet your money down into the abyss if the market takes a bearish turn.
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Explaining with an example
Let’s explain the concept of profit and loss in crypto margin trading with an example.
Say, you start crypto trading by investing $100 in Ethereum. Now, the price rallies up by a handy 10%. In that case, you will make a decent profit worth $10.
But, if you go for crypto margin trading and add 5x leverage to your investment capital, the profit (based on the example above) would grow by five times, reaching to $50.
While 5x more profit is always welcome- just remember, if the market takes a dip, you will incur 5x more losses, based on your range of leverage.
It’s to note here that crypto margin trading is an expensive affair. On one hand, you will have to pay back the leverage amount that you had borrowed from the crypto margin trading exchange. On the other hand, since it’s a borrowed fund, you will need to pay a handsome interest to your broker or exchange.
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The amount of money you would have to shell out for the loan and interest rate gets easily compensated when the trader makes high profits. But, imagine the arduous burden you would have to shoulder when you have ended in huge loss and still have to repay your debt and submit the interest!
Minimum equity margin
This is a crucial point to consider before getting into crypto margin trading.
If you are into crypto margin trading, you are required to keep a minimal equity level in your exchange account. It could be around, say, 30 percent of open positions.
In case, your balance goes below the minimal equity amount requirement, you will have to add in more funds to prevent liquidation. The official term for this position is “margin call”. And if you cannot respond to margin calls successfully, your crypto margin trading account will shut down automatically.
Concept of liquidation
Liquidation price is one of the major aspects of crypto margin trading. Liquidation margin is defined as the present value of your crypto margin trading account on the basis of cash deposits- as well as the latest value of open positions.
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If the market hits liquidation price, your crypto margin trading broker or exchange will close the position. It will help to prevent loss of borrowed funds- however, the margin trader will lose out his main investment capital.
You should also know that if you trade with your own investment capital and do not lend money for leverage, liquidation price will be zero (in long position). But the price will increase based on the range of leverage you add to your crypto margin trading account.
Pro tips for crypto margin traders
If you are new to the crypto margin trading arena, these tips will help you to get started and prevent huge losses.
This is the basics of any trading strategy, including crypto margin trading. This tip is especially crucial when you are a new trader and just starting out.
Please stick to small amounts in your initial stages of crypto margin trading. It should be an amount that won’t hamper your daily essentials and basic lifestyle if you encounter a loss. You will need to practice a lot in real time before you become a pro trader. And since you will practice in real time, you will also be losing money in real time. So, small investments will keep the losses low.
Opt for Stop losses
Stop losses could be a savior in crypto margin trading. A handy risk management strategy, this tool will save you from mammoth losses in case the trade goes awry. But, remember, you should not place stop losses extremely close to purchase price. Also, don’t set it too far as well.
Check out available interest rates
Different crypto margin trading exchanges will charge different interest rates. So, don’t just jump into the first exchange you come across online. Smarter thing would be to take a thorough study on at least 5-6 crypto exchanges so that you can settle with the most competitive rates.
Don’t stay passive
You can’t expect great results with crypto margin trading if you don’t keep yourself updated about the ups and downs in the market. You have to monitor the market every single day to spot signs of bearish turns before it’s too late. Alert and regular monitoring will save you from large-scale losses in crypto margin trading.
Don’t put the entire money in one go. You might have set a specific investment capital to deploy in crypto margin trading. The tip is to not put the entire money at one go. Start slow, as mentioned before- keep on adding in short amounts as you proceed. It will help to save you from huge losses.