What is Margin Trading? Should newbies use Margin Trading?

By Le Anh | Trade

What is Margin Trading

Margin Trading, Long, Short are the words you often encounter in the discussion group about cryptocurrency trading.

Especially for those new to the market will not understand what these words mean?

In this article, I will mention the most basic and necessary information when you first enter the cryptocurrency market to help you have the right approach to Margin Trading.

OK, got it Let's start learning about Margin Trading!

Margin Trading is also known as margin trading. It is a form of trading that uses financial leverage so that users can trade or exchange for a larger amount than they have. From there, create higher profits and of course the risk will be higher than normal trading.

Margin Trading is a popular tool in low volatility markets such as Forex, Stock Market. Currently, Margin Trading is also available in the cryptocurrency market with the following trend being products Crypto derivatives (Derivatives).

For those who don't know about Crypto Derivatives: What is a Crypto derivative transaction? Overview of Crypto derivatives

Advantages and disadvantages of Margin Trading

Advantages

For ordinary trading (spot trading), you can only make a profit by buying at low prices and selling at high prices. But for Margin Trading, you can make a profit regardless of whether the market is up or down.

At the same time, using leverage makes the capital you can use to enter orders much larger.

Defect

With the ability to create high profits compared to the capital you have. In return, when using Margin Trading you will have to suffer VERY HIGH RISK.

For normal transactions, if you have the chance to buy coins at a high price and the price of coin is greatly reduced compared to the point of purchase. You still have a chance of waiting for it to rise again.

As for Margin Trading, if the loss exceeds the liquidation price compared to the entry point. Your coins will be sold and you will no longer have a chance for it to rise again.

How does Margin Trading work?

Before going into learning how Margin Trading works, I want you to grasp some of the most basic terms in Margin Trading. Including:

Leverage (Leverage)

When using leverage, you can trade for x times the capital you have. Where x is a positive number.

For example: You choose 10x leverage which means you can use the money 10 times to trade compared to the capital you have.

Position

In Margin Trading, there are 2 positions including: Long and Short.

  • Long Position: Shows buy position.
  • Short Position: Displays the position to sell.

Liquidation Price (Liquidation Price)

This is the liquidation price. When the coin price exceeds this price, the system of the exchange will immediately liquidate all of your coins into that order.

The operational nature of Margin Trading:

When you execute the command LONG / SHORT with leverage x with the amount of capital Y. This means that, you will borrow from the floor the amount corresponding to the formula (x-1) * Y to execute that LONG / SHORT command.

note: This formula will be different for each floor. Which floor you play should refer first.

After closing LONG / SHORT orders, you need to return the exact amount borrowed from the exchange plus a loan service fee.

In the case, you enter the LONG / SHORT order but actually the price goes against your predictions.

When the price touches the liquidation price, the liquidation floor will liquidate to get back the capital you borrowed, this difference will be deducted from your original capital.

I will give an example for you to easily imagine the following:

Suppose, I have a capital of $ 10,000, the Bitcoin price is at $ 10,000 and I predict Bitcoin will increase to $ 11,000.

If I trade normally, I will make a profit of $ 1,000. But, I want to optimize and increase the profit by 5 times.

Therefore, I will open a LONG order with LEVERAGE 5x. This means that I will create a Buy order at $ 10,000 with a volume of $ 50,000.

In the best case scenario, Bitcoin goes up to $ 11,000 and I close LONG (sell) and I will have profit of $ 5,000 instead of $ 1,000 in normal trading.

Explain:

When I executed the Long order with 5x leverage, I essentially borrowed an additional $ 40,000 from the exchange to execute a BUY Bitcoin order at 10,000 with a volume of $ 50,000 (ie I have 5 BTC).

After that, Bitcoin increased to $ 11,000 and closing my LONG position meant that I sold 5 BTC at $ 11,000 and earned $ 55,000.

Next, I have to pay back $ 40,000 of the loan borrowed from the platform plus the service fee. And, the capital capital result increased from the initial $ 10,000 to $ 15,000 (+ 50%).

In the worst case scenario, the price doesn't go as expected and falls to $ 8,000. Suppose, this level of 8,000 coincides with the liquidation price.

Immediately, the exchange will liquidate 5 BTC at $ 8000 or $ 40,000 and recover $ 40,000 that they borrowed. At this time, I was originally a zero or so FIRE ACCOUNT.

Each floor has a different way of calculating the liquidation price for each different leverage. So before you enter the order you should find out how margin trading on each floor works like?

You refer to how to trade margin in the article about the trading floor that you are interested in: Instructions on how to trade margin

Should you use Margin Trading?

Indeed, Margin Trading is a financial tool that helps small traders very well.

However, using Margin Trading requires understanding, grasping the techniques of analyzing price charts, combined with seasoned experience and a spirit. STEEL DISCIPLINE. To avoid the highest possible risk is FIRE ACCOUNT.

Therefore, any newcomer entering the market should not touch this dish. There is no way out of the dyke.

Reputable Margin exchanges

Referring to Margin Trading, surely it will be impossible to miss the name BitMEX with legendary 100x leverage.

In addition, there are many other reputable exchanges that support Margin Trading with the maximum leverage ratio as follows:

On each floor, there will be a way to calculate the charge and the amount of the loan, and the liquidation price varies. Which floor you use, read the rules of that floor carefully before trading.

Experience using Margin Trading

Always have a trading plan before entering the order

This is immutable if you want to succeed in normal trading, especially Margin Trading.

You need to prepare yourself a specific trading plan clearly and follow the discipline according to that plan.

Before entering the order, you must determine the entry point, take profit point, stop loss, how much the win rate, how much leverage .... A lot of things you need to draw on a command plan.

Do not use borrowed funds to enter orders

There have been many cases of borrowing other people's capital to play and then burning accounts leaving serious consequences for both the borrower and the lender.

If you play Margin Trading consider the money you can lose and never all in one order.

Not DCA with high leverage

When using high leverage, you are at a higher risk than low leverage. Therefore, please balance and follow the plan you have set.

Epilogue

I believe that after reading this, you must have understood the most necessary and basic information about Margin Trading.

Hope you are well aware of the opportunities and risks when using Margin Trading. Especially those who have just entered the tempting cryptocurrency market.

If you see the information by yourself and the team Coin98 The offer is helpful. Do not forget to share this article with other brothers to read it!

Hello and see you again in the upcoming article!

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