In simple terms, margin trading is borrowing funds from a third party and using those funds for trading assets.
Crypto margin trading exchanges are quite popular due to the fact they provide more trading room for you. Margin trading increases trading results, allowing you to earn greater profits on successful trades. This expanding facility is beneficial in high-volatile markets like cryptocurrencies.
How Does Margin Trade Work?
In crypto trading, you need to open an account with an initial deposit. This initial deposit is called the margin that creates your position. It is crucial to keep some amount in your account to hold your position. The deposited amount/capital is used as collateral by the crypto margin trading exchanges.
The capital determines the amount you will be able to leverage from the exchange. The leverage rules solely depend upon the platform that you have chosen and their rules. But in general, exchanges offer from 30x to 1000x leverage. You can use this extended capital to increase your buying capacity with the existing capital.
Hence, margin trading offers substantial profits, helps diversify your positions, gives access to more funds, and helps learn your new trading strategies. The greater relative value of the trading positions offers far greater profits.
Margin trading is ideal for diversification as even with a small amount of capital, you can open several positions. But, before you delve into it, there are some things that you need to keep in mind. The tips are given below.
The Best Tips for Crypto Margin Trading through an Exchange
Don’t Get Overwhelmed
Looking at the high leverage, you can often get overwhelmed and excited to trade big. But you need to understand that the market of cryptocurrency is volatile. The market can go down, and you will lose all your money. Start with the money that you can afford to lose and can live without.
Low levels of leverage help you understand how margin trading works. However, you can maximize your returns later when you have gained some confidence doing it. You can repeat your successful strategies for trading with more funds.
Calculate Your Liquidation Risk
You must know about the liquidation price of your position. A liquidation price is a price at which you will lose your position, and it will be liquidated. As you know, crypto markets are volatile.
Long or short squeeze and price manipulation are quite common. And, be prepared for it as it is going to affect your position. Long term trades are riskier due to narrow liquidity space. It can mean that a high leverage account is more susceptible to liquidation.
Use A Stop Loss
Stop-loss is an excellent tool for risk management in margin trading. It can help you prevent significant losses when your trade goes the wrong way. It’s essential to place your stop by analyzing the market carefully.
For example, if you place your stop loss close to your purchase, you might be stopped before the market goes in your favor. Similarly, if it’s too far, you might face losses more significant than your trade’s worth. So, utilize this function correctly.
Buy In Limits
To lower your risk of investment, you must place your orders at different time slots. Consider, you have placed a bulk order, and something unexpected happens in the market. At this point, you can lose all your money. But if you had bought smaller quantities, you could make some adjustments later when the marker gets stable for increasing your profits. You need to keep some funds with you always. Spare cash will help you control and steer your trade’s direction.
Monitor Your Positions
Crypto trading is not for passive investors who can relax once they have invested. You have to monitor the market movements for days continually and even for weeks. A wrong decision can lead to significant losses, especially if you are in margin trading. You must make a plan and stick to it. You need to set your goals. By closely monitoring your trades, you can modify them to cut losses and increase profit chances. Avoid making any wild guesses without any proper information.
Margin trading helps keep a smaller number of cryptocurrencies in the exchange at a time. However, you can secure your funds by keeping them in cold storage, like an offline wallet. Only keep the amount you need to trade on the exchange. It will help reduce your risks in case your account is hacked.
Besides, it will secure some extra funds to hedge down your trade-in trying times. It’s worth noting that many crypto margin trading exchanges having higher margin rates also have higher fees and tighter liquidation prices. So, choose your options wisely.