Leverage trading

What exactly is leverage trading?

When trading with leverage, borrowed money is used to increase one’s trading position. The result is you will have a larger position than what would be available through your own portfolio. Exchanges allow the use of leverage trading whereby the exchange themself will provide the borrowed funds. Please beware, trading with the use of leverage can result in an increase in both profits and losses.

Leverage, also called risk level, is therefore a temporary loan that is provided by the exchange to the trader. It allows the trader to opan a position larger than the invested capital. The leverage is presented in the form of a multiplier (x3 - x5 - x10 – cross leverage) which indicates how much more than the invested amount of a position is worth.

In the case of cryptocurrencies, money is usuallt borrowed from the crypto-exchange itself. Crypto trading offers high leverage trading, and even cross leverage. With these kind of trades the trader is capable of building and controlling a huge amount of money with just an initial margin.

Who are the providers of leverage trading?

Leverage trading is offered on various crypto exchanges such as: Binance, Bitmex, Kraken and Bybit. These exchanges themselves provide a lot of information about leverage trading in their FAQ’s, or via their own educational program. At Margin Traders we also offer our customers the possibility to trade with leverage. Before we started leverage trading ourselves, we practiced a lot with “paper trading” and traded without real money first. The reason for this is to emphasize once again that both the gains and losses can be enormous, and in the worst case you can lose your portfolio in no time.

You do not have to worry about leverage trading once you have learned how it works and how to apply it correct. With proper riskmanagement it is possible to use leverage successfully and profitably. Leverage must, on the other hand, be handled very carefully. Once you master this you do not have to worry about your own accumulated capital anymore.

Leverage (hefboom) trading-2

The pros and cons of leverage trading

There are several advantages to leverage trading, so many that it has become a popular concept in the world of crypto trading.

The pros

It minimizes the capital that the trader has to invest. Instead of paying the full price for a currency, the trader only has to pay a small part of it. This part is also known as the margin.

Some cryptocurrencies are relatively cheap, which means that almost any trader can trade them easily. However, some are considered more prestigious and based on their traded frequency and other factors, they are more expensive, such as BitcoinCash (BCH). Instead of investing large amounts of money to participate in their markets, one can take advantage of trading with leverage to enjoy the fluctuations in the price of these cryptocurrencies.

The cons

Although trading with leverage or margin trades involves less capital, this also increases the risk of loss. Someone can gain much more than their initial investment, but losses can occur on the same scale. It is important to keep track of open positions and apply a stoploss to avoid major losses.

Finding the right leverage

When we decide to open a trading position, we first need to know the applied margin, set a target and define the maximum loss with a stoploss order that will automatically sell our position to avoid even further losses.

Choosing the right leverage depends on several factors such as your ability to manage your risk and your chosen trading strategy. If you trade in the short term, your profit expectations are not very high. In scalping, traders’ profit targets are tight. To maximize their profits it is necessary to use a large leverage. However, when the size of your investment is large it is recommended to use a small leverage to ensure that opposing market movements will not make you lose all your invested money. It is possible to define very simple risk management rules to avoid being surprised by the leverage effect.

The increase the size of your portfolio due to the effect of leverage will allow you to multiply both potential gains and potential losses. If you no longer have any capital available, no new position can be opened.

By using smaller amounts with leverage you also have the option of setting a wider but reasonable stoploss to avoid a higher loss. A highly leveraged trade can quickly drain your portfolio if it turns against you. Keep in mind that the leverage is completely flexible and adaptable to the needs of each trader.

Important tip from Margin Traders

Try leveraged trading with “paper trading” first or without real money and practice a lot. Using leverage carries a higher risk because leverage increases both profit and loss. If you use leverage on a trade and the market turns against you, your loss will be greater than if the leverage had not been applied at all.

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