What Is Margin Trading in Crypto?
In simple terms, a crypto margin trade enables the trader to borrow funds from the platform to increase their buying power in a single session. It enables you to open a bigger position than you could with you actual account holdings.
Table of ContentsIntroducing the world of margin tradingDefinitionBuying and Trading on MarginMargin trading with TLOSThe Benefits of Margin TradingPractices for Successful Margin TradingTips for Managing RiskMore resources:
There are multiple avenues that you can use to get started with trading cryptocurrencies - one of them is margin trading. Margin trading opens up many possibilities for Telos users to gain more profits by borrowing funds from a third party to amplify the trading amount. This article will equip you with a better understanding of all the “Margin Jargon” so that you can reap the rewards of margin trading with Telos.
Introducing the world of margin trading
Margin trading is when you buy and sell crypto with borrowed money.
Margin trading is built on so-called leverage, which is the idea that you can use borrowed money to buy more crypto and potentially make more money on your investment. But keep in mind, leverage is a double-edged sword that also amplifies your risk. While you might make more money if you bet is right, you also might lose more.
Most of the time, someone who signs a margin agreement can borrow up to 50% of the purchase price of a marginable investment. Under margin trading rules, you could buy twice as much crypto than you can actually afford.
In simple terms, a crypto margin trade enables the trader to borrow funds from the platform to increase their buying power in a single session. It enables you to open a bigger position than you could with you actual account holdings. This high risk / high reward trading method opens up the possibility to yield much higher returns with less capital from your own account, but could also lead to higher losses.
Buying and Trading on Margin
To trade on margin, you require a margin account. This differs from a regular cash account, in which you trade using the money in the account. Investors will firstly deposit cash that serves as collateral for the loan and then pay ongoing interest payments on the money they borrow. This loan increases the buying power of investors, allowing them to buy a larger quantity of securities. The securities purchased automatically serve as collateral for the margin loan.
Margin trading with TLOS
If you want to start margin trading with TLOS, you can try KuCoin or MEXC crypto exchanges, as both have this option now.
Read more about margin trading on KuCoin here.
Read more about margin trading on MEXC here.
Access a beginners guide for MEXC here.
This process is fairly simple as a margin account provides you the resources to buy more quantities of a stock than you can afford at any point of time.
The Benefits of Margin Trading
A trader can open a position that exposes them to more profits than they would normally gain with their original assets. A successful trading position at a 100X leverage will give the trader 100 times more profits than what they would have earned in normal trade.
Practices for Successful Margin Trading
To minimise risks and increase the possibility of realising gains from margin trading, consider the following:
As a general principle and rule of thumb is that one should never invest a sum of money that they cannot afford to lose. Margin trading creates a risk of amplified losses. Investors should only invest if they have sufficient funds to withstand a temporary move against their position and meet a margin call, if necessary.
Borrow less than the allowed limit
Refrain from investing in every stock on the market just because you have access to more capital. The best thing that you as an investor can do is to invest small amounts first. With time, you can build up your confidence and gain enough skills to invest in riskier but more rewarding stocks.
Borrow only for the short term
A margin loan is like any other loan. As is the case with a mortgage or a car loan, the margin account holder is required to pay a monthly interest charge. The longer it takes to pay the loan and the larger the sum of money borrowed, the higher the interest expense will be.
Tips for Managing Risk
Some tips that traders use to reduce the level of risk associated with margin trading include:
- Start with a small trading position with lower leverage. Investors can increase their trading size with time as they understand the market and the position itself.
- It is advisable to start with demo trading. A demo trade immerses the first-time traders in a simulated trading ecosystem that will allow new traders to gain insight into trading activities and gain new trading strategies.
- Having multiple profit-taking levels will allow them to grow their chances of making profits as it minimises their risk by spreading out their position.
- Evaluating interest and fees is a must. When repaying the borrowed amount, traders need to include interest as well. Taking interest into account before borrowing funds is always a good strategy.
- Always looking out for how external factors influence the crypto market gives traders a clear idea of which position to take. Hence, they try to track any regulatory changes, market performance, and other factors that may influence prices.