Margin Trading Explained



What is Margin Trading?

Margin trading is a technique that utilises funds from a third party to trade assets. In contrast to normal trading accounts, trading with margin accounts allow users access to leverage their positions and enable them to access bigger capitals. What they essentially do is make the traders understand the bigger profit margins on successful trades in a bid to expand trading results. The ability of margin trading to amplify the trading results makes it successful in the international Forex markets from the low-volatility market circles. Besides international Forex, people also use margin trading in cryptocurrency, stock and commodity markets.


How Does Margin Trading Work?


As indicated with the name, in margin trading, traders have to set aside a specific percentage of their total value of order. This small percentage, called a margin, is just like the leverage concept and describes the borrowed funds to the margin in a specific ratio. For instance, if you want to open a trade of $100,000 with a leverage ratio of 10 to 1, you’ll need to set aside $10,000 of your total trading capital.

Every trading platform has its own sets of standards, policies and more importantly, the leverage rates. In the cryptocurrency platforms, leverage ratios typically lie between the values of 2 to 1 and 100 to 1. The trading circles refer to these rates as multiples like 2X, 10X and so on.

Margin traders can open short positions in hope that the asset prices will fall or they can open the long positions in hopes of watching the asset prices rise. If the market moves against their position to a certain threshold, the traders will have to surrender their assets set aside as collateral.


Pros and Cons:

Due to the greater value of trading positions, traders committing to margin trading can receive hefty profits. This is one obvious advantage involved with margin trading. It can also prove to be useful to diversify a trader’s portfolio enabling them to open multiple positions quickly with minimal capital.

Parallel to these glaring advantages with quick profits, margin trading can also result in obvious losses too. You can end up losing more capital than you invested just like in high-risk trading. Small drops in market can result in substantial losses so it’s important that you employ appropriate risk management techniques and risk mitigation strategies.


Cryptocurrency Markets With Margin Trading


Due to the highly volatile markets that margin traders work with, margin trading with cryptocurrencies can become a risky venture. Considering the fact that margin trading is inherently riskier as discussed above, it’s certainly not something an amateur or a beginner should look into no matter how good their risk management or hedging are. 

A thorough technical study and extensive experience of spot trading is extremely necessary for users to venture into these waters. It doesn’t matter if you’re well-equipped with skills like identifying trends, observing charts or determining exit and entry points, they won’t help you completely mitigate the risks tangled with margin trading.


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