Margin Trading: The Ups and Downs

2022-04-22, 09:21

Margin trading is a strategy whereby traders borrow funds against their initial capital in order to trade cryptocurrencies or other securities.

If properly executed, margin trading enables portfolio growth within a short period.

A successful margin trader sticks to a premeditated execution plan.

Gate.io is a centralized exchange which offers margin trading services.

Many people use margin trading strategies to increase their portfolios. Despite the fact that it is not a sure recipe for success, if you master it well the returns may be huge. This article should equip traders with the basic tips required to succeed in margin trading.

What is margin trading?

Now, it is time to understand the concept of margin trading. In simple terms, margin trading means using funds borrowed from an exchange or any other trading platform to trade a cryptocurrency. The traders can use the borrowed capital to open more positions than their funds can allow them to do. Although margin trading can increase profit, it also heightens the risks.

To use margin trading, the trader should provide an initial deposit to open a position. This deposit acts as collateral to the loan which the individual gets. Let’s use an illustration to make this point very clear. If a trader opens a position with $100 on a trading platform with a leverage of 200: 1, he/she is entitled to a total capital of $20 000. As you can imagine, if this trader successfully trades using the entire $20 000, he/she can get a high return and increase his/her portfolio significantly.

Hints for successful margin trading

Whereas the idea of margin trading may sound lucrative, failure to execute the trades well may lead to high losses, which is the reason why you have to pay close attention to essential tips to succeed.

Understanding the margin rules of the trading platform

Every margin trader should understand the margin rules on the platform he/she is using. This is because the various trading platforms have different rules regarding the interest rates, time to lapse before margin calls and maximum time for lending. Each of these affect the individual’s trading strategy and the related risk factors. A trader who is well-versed with these rules will make more appropriate decisions than someone with little knowledge of these.

Start small
The next important tip is to start your trades with small amounts and increase with time. It is wise to start with a small amount which you are willing to lose rather than investing the entire amount on the go. For instance, instead of trading $10 000 worth of cryptocurrency at once, you can make ten trades of $1 000 each, spread over a month. This spreads the risks over various cryptocurrencies or the same cryptocurrency over different conditions.

The other important reason for spreading the trades is to handle margin calls. In this context, a margin call is a demand made by the crypto exchange for the trader to deposit further funds in order to cover up for additional potential losses. If the user fails to deposit more funds the position will be closed and the position liquidated.

Related to margin calls, a trader should put aside back up funds for margin trading. As a result, if there is need for margin calls one can use this fund instead of having the position liquidated.

Pay attention to the liquidation price
The trader should keep attention to the liquidation price of his/her position. The liquidation price is the price when your trading position will be closed due to the continual decrease of the balance. By maintaining a close watch of the liquidation price an individual can close off some positions and take liquidity in time.

Always use stop losses to avoid total loss
Stop loss orders are suitable tools to prevent huge losses when margin trading. The stop order helps you to get out of a position before you lose your entire investment. This means that you will retain much of your invested funds despite the unexpected turn of events.

Source: Amanahadvisor

However, when setting the stop losses you should make a wise balance. It is unwise to put your stop loss too close to the purchase price as it limits the gains you make if the trend is positive. In contrast, setting the stop loss too far from the purchase price may result in substantial losses, if the trend is negative.

Limit the leverage you use
The margin trader should limit the leverage he/she takes in order to reduce any potential losses. Although the trading platform offers you 100% leverage, you may decide only to take 20%, 30% or 50%. A lower leverage can enable the trader to hold a position for a longer period than a higher leverage. However, if the trade reveals the actual trend, one can increase the leverage.

Have a clear plan and stick to it
It is important to have a clear trading strategy and follow it.Your ability to stick to your trading strategy depends on emotional discipline. If you involve too many emotions when making trading decisions the chances are high that you can make losses. The trick here is to remain patient when evaluating your trading strategy.

Pay attention to news which has an impact on investments
Every successful crypto trader should keep track of the news which affects the investment climate of the portfolio one is dealing with. The truth is that there is much news out there which affects the prices of cryptocurrencies. For instance, the news about the adoption of a certain cryptocurrency by a country may result in an increase in its price, especially in the short-run. On the other hand, news on the possibility of harsh regulations of cryptocurrencies may lead to a bearish market.

Have the appreciation of technical analysis
To become a successful margin trader you need to understand the technical analysis of cryptocurrencies as this helps you to manage risks. Of course, you may not need to know the various components of technical analysis. However, you need to have an understanding of aspects such as support and resistance. You may also need to have knowledge of RSI and MACD indicators. Such knowledge will help you make informed decisions.

Margin trading at Gate.io

Gate.io is one of the central exchanges which offers margin trading features. Basically the leverage ratio determines the margin loan. Currently, the leverage ratio is between 3 and 10. This means that someone who has 1 BTC can get a margin loan of 2 BTC.
The maximum margin period is 10 days. The platform calculates the interest payable after 4 hours on an hourly basis. Gate.io helps to manage your risks as it gives you alerts using your email address. You can find the margin trading conditions in this article, Margin Loans.

In order to start margin trading you visit “Trade” and click on “Margin Trading”.

You have to agree with the terms and conditions in order to proceed with margin trading. Once you do that you head straight to the margin trading platform.

Conclusion

All in all, margin trading is a profitable strategy if you know how to execute your plan well. However, like any other trading strategies, it has its downside, especially the potential of loss and liquidation. Gate.io has a margin trading feature with a leverage of between 3 and 10. Once you have a verified account, you can start margin trading at any time.

Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.