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Margin trading – what is it?

Home - Blockchain Academy - Margin trading – what is it?
what is margin trading

The popularity of cryptocurrency is increasing. Their use is becoming increasingly common. Therefore, it is worthwhile to expand your knowledge on this subject. Today, we discuss a process called margin trading. What is margin trading? We already explained.

What is trading on margin?

What does the term margin trade mean? Most specifically, we can call this process simply credit, because we trade with funds provided by third parties. Traditional trading is based on the capital we currently hold. On the other hand, an account on the stock exchange, which has access to the leverage function, allows investors to take advantage of the opportunity to increase their invested capital, as they multiply it by a loan.

This trading option is popular in markets that are characterized by low volatility of asset prices. However, margin trading is possible in markets related to trading stocks, commodities and crypto. As far as the cryptocurrency area is concerned, the funds are usually provided by other traders, so they receive a corresponding percentage. Sometimes crypto trading platforms decide to grant credit to traders who are interested in margin trading. Nevertheless, this is a little known and used opportunity.

What does the whole process look like?

If you want to start margin trading, as a trader you have to provide a percentage of the total loan value. This percentage is simply a margin and is related to the whole idea of this trading. Based on the amount of funds in the deposit, you create leveraged orders. Leverage is the ratio of the funds contained in the loan to the value of the margin. It looks like if you want to trade $100,000 with a 10:1 leverage, you must have $10,000 of your own funds.

Exchanges that offer margin trading differ in the offers and rules associated with this form of trading. Margin values are particularly variable. On a traditional stock and bond exchange, the leverage is usually 2:1. On the futures markets, the margin trading is 15:1. In the crypto industries, the leverage used ranges from 2:1 to 100:1.

Pros and cons

One of the main advantages of margin trading is simply the possibility to make more profit by relying on a better value of the trading position. An additional type of transaction of this kind is useful when diversifying your trading strategy. Traders using margin trading have the opportunity to create several positions using a small amount of their own capital. And an equally important advantage is the fact that the margin account makes it easier to trade with a quick release of positions, so that they do not bear the costs associated with moving money between accounts.

the advanatges of margin trading

Source:medium.com

A significant disadvantage of this process is the risk of increasing losses. In traditional trading we manage private capital. Margin, on the other hand, introduces the risk of achieving losses that exceed the trader’s initial capital, because some of the funds are simply obtained in the form of credit. Depending on the margin used by the market participant, the losses can be enormous even with a slight decrease in the value of the invested asset. This is why an appropriate trading strategy or the use of alternative market management methods is so important in this process.

Margin trading in crypto

Nevertheless, margin trade is more risky than traditional trading, especially in cryptocurrency markets. Currently, the volatility of crypto prices is high, so you should be particularly cautious when dealing with margin trading in the digital currency world. It is certainly not worth using it at the beginning of a crypto investment.

Analytical predisposition, proper identification of market trends or determining entry and exit points are not enough to avoid risk when margin trading. However, such skills can help to develop a better trading strategy. If you want to try this type of trading, first carefully analyze the basics of technical analysis and gain first experience in cryptocurrency trading.

Margin funding

You’re afraid of too much risk that margin trading? For people like you there is a special variant of leveraged trading – margin funding. Trading platforms, including crypto exchanges, offer their traders the opportunity to transfer funds to users to finance leverage transactions with other users.

This is done according to rules defined in advance and accepted by both parties to such a transaction. If the trader accepts the margin funding terms, the lender has the right to obtain a regular repayment of the loan granted together with interest. Although the rules of this type of trading vary from platform to platform, the risk of providing a margin fund for other traders is low. And why? Because margin positions can be removed to prevent possible losses. However, during this process all funds must be kept on the exchange.

So what is the margin trading? It is a useful tool, for users who want to increase profits from successful transactions. Proper application of this process will make investments more profitable. If you make a bad decision, the losses can be huge. That is why this type of trading is dedicated to the most experienced traders.

Magdalena Aleksander

About The Author

Magdalena Aleksander
Junior Marketing Specialist

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