What is Margin Trading? Experience for beginners

Margin Trading is a very popular form in the cryptocurrency market. Many investors choose this method of trading to increase their profits. This term is frequently used on cryptography discussion forums. So what is margin trading cryptocurrency? Let's find out with Market247.io in this article.

What is margin trading?

One of the questions that many beginners to the cryptocurrency market have is "What is Margin Trading in crypto?". Margin Trading is a form of trading that uses financial leverage, allowing traders to buy and sell assets for more money than they have. Essentially, margin trading amplifies trading results. From there, this method can improve returns for investors.

In markets like Forex and Stock, where volatility is relatively low, this type of trading is extremely common. The cryptocurrency market has recently seen a rise in the popularity of margin.

How does Margin Trading works?

To understand more about the essence of what is Margin Trading in crypto market? We will learn about how this trading method works.

A Margin trade will have two positions, Long and Short.

A long position reflects an investor's prediction that the coin's price will increase in the future. While a Short position predicts the asset price will fall. Thus, when you think the coin price increases, then you need to open a long position to buy the asset and vice versa.

To execute a trade, you will be required to provide an initial deposit to open a position. This initial margin is closely related to leverage.

Let's say you have capital Y, leverage x. This means that to open a LONG/SHORT position, you will borrow an amount from the exchange corresponding to the formula: (x - 1) * Y

Example: To open a $50,000 trade with 10x leverage, the amount you need to deposit is $5,000 and the amount you need to borrow minus $45,000

The profit will depend on the investment amount and the leverage that the investor chooses. Today's trading platforms will offer different levels of leverage. While some platforms offer relatively low leverages like 2x, 5x, 10x, some offer leverage up to 100x.

In case investors execute a Long/Short order but the actual price goes against the original prediction, if the balance is not enough, the exchange will issue an order to close the trading position. It is called Margin Call and this happens when the loss drops below the specified level. At this time, the floor will liquidate to collect the capital vat, the difference in loss will be deducted directly from the original capital.

Example of Margin Trading

Let's say you have an initial capital of $20,000. BTC price is currently at $20,000 and you expect the price to rise to $21,000.

If you make a Spot Margin trade buy 1 BTC, then when the price rises as expected, you will have a profit of $1,000. However, if you want to increase your profit 5x, you will open a Long position with 5x leverage. Thus, you have borrowed from the exchange an amount of $80,000, your total capital is $100,000. At this point, you will use this money to buy 5 BTC.

If the price moves as expected, it rises to $21,000 and you close the long position. Now you have sold 5 BTC for $21,000 and earned $105,000. After that, you need to pay back the $80,000 borrowed from the exchange. As a result, you increased your principal from $20,000 to $25,000. Profit $5,000 compared to the amount of $1,000 if making a normal trade.

In the opposite case, BTC price drops to $19,000 and hits the liquidation price. At this point, the exchange will sell out 5 BTC at the price of $19,000 and you need to return the $80,000 borrowed to the exchange. Your account will be burned.

Advantages and disadvantages of Margin Trading

Advantages and disadvantages are also an indispensable part to answer the question “What is Margin Trading?”.

Advantages

Increase profits: With this form of trading, investors can increase their profits many times compared to normal coin trading, by using financial leverage. This form is very suitable for traders with limited capital because they can have the same opportunity to profit as traders with large capital.
Make a profit even when the price rises or falls: Compared to spot trading, you buy assets low and sell high for a profit. However, with Margin Trading, even if the price of coins drops, you can still make money. This is done when you choose a short position to trade.

Disadvantages

The biggest disadvantage of Margin Trading is the very high risk.

Risk of using too much leverage: The fact that users choose to borrow a lot of capital from the exchange to increase profits means that the pressures and risks will be much greater.
Risks from electronic price fluctuations: The cryptocurrency market has a very large and continuous price fluctuation range. Therefore, you need to be equipped with a very good knowledge of technical analysis to be able to predict the main trend of the price and make the right investment decisions.
Risks from investors themselves: Skill in analyzing the market, predicting trends incorrectly, and using excessively high leverage. When the market moves against the plan, the loss will be even heavier.
Risk of position liquidation: When the market goes against the investor's price predictions, in case the margin account is not enough to maintain the initial position, your order may be forced to liquidate. physical. This means you will lose your initial deposit.

Important terms

Here are 3 important terms you need to grasp when learning "What is margin trading strategy?"

Leverage: This is an exchange's support for your trading. Using financial leverage, you can trade with many times your capital.
Position: In Margin Trading, there are 2 positions, Long and Short

Liquidation Price: Liquidation Price: Is the price at which when the coin price exceeds this price, the exchange's system will immediately liquidate all your coins when entering that order.

When to use the Margin Trading method?

It can be said that, compared to normal trading methods, Margin Trading brings much greater profits. However, along with that benefit, the risk level is also increased many times. Therefore, you should only use this method in the following cases:

You already have experience in the crypto market, have knowledge of technical analysis, read and analyze price charts, understand market mechanisms and trends. For new traders who do not fully understand what Margin Trading is, how it works and exchanges, they should not use this method.
When the market shows signs of steady increase or decrease in price. Margin should never be used in the Sideway market and there is no clear trend.
Margin trading is an effective trading tool in the short term. The long-term use of Margin can be ineffective and often involves a lot of financial risk.

Conclusion

Margin trading is a commonly used form of trading in the crypto market that helps increase profits for investors. This type is especially suitable for traders with limited capital. Through this article, Market247.io believes that you clearly understand what is Margin Trading in the crypto market. If you have any questions about What is Margin Trading, don't forget to send us a message for the fastest response.

What is Margin trading method? FAQs

The most reputable Margin Trading exchanges today?

FTX: FTX is one of the best brokers for derivatives trading. FTX's leverage calculation is different from that of regular exchanges. When you adjust how much leverage, the entry amount will be the same, only the principal amount is different. This affects how much you get or lose as the coin price rises or falls.
Binance: This is no longer a strange name for crypto market participants. This is the exchange with the highest number of users and liquidity in the market today.

What is 100x leverage in crypto?

With 100x leverage, $1 can be traded into $100 and traders can get all the benefits of $100 so their ROI can be at its peak.

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What is Margin Trading? Experience for beginners - Market247.io