Leverage Trades
Leverage trading amplifys your buying or selling power, allowing you to trade larger amounts. .
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So even if your initial capital is small, you can use it as collateral to make leveraged trades. While leveraged trading can multiply your potential profits, it is also subject to high risk - especially in the volatile crypto market. Be careful when using leverage to trade crypto. It may lead to substantial losses if the market moves against your position.
Leverage trading can be confusing, especially for beginners. But before experimenting with leverage, it’s crucial to understand what it is and how it works. This article will focus on leverage trading in crypto markets, but a great portion of the information is also valid for traditional markets.
What is leverage in crypto trading?
Leverage refers to using borrowed capital to trade cryptocurrencies or other financial assets. It amplifies your buying or selling power so you can trade with more capital than what you currently have in your wallet. Depending on the crypto exchange you trade on, you could borrow up to 100 times your account balance.
The amount of leverage is described as a ratio, such as 1:5 (5x), 1:10 (10x), or 1:20 (20x). It shows how many times your initial capital is multiplied. For example, imagine that you have $100 in your exchange account but want to open a position worth $1,000 in bitcoin (BTC). With a 10x leverage, your $100 will have the same buying power as $1,000.
How does leveraged trading work?
Before you can borrow funds and start trading with leverage, you need to deposit funds into your trading account. The initial capital you provide is what we call collateral. The collateral required depends on the leverage you use and the total value of the position you want to open (known as margin).
Say you want to invest $1,000 in Ethereum (ETH) with a10x leverage. The margin required would be 1/10 of $1,000, meaning that you need to have $100 in your account as collateral for the borrowed funds. If you use a 20x leverage, your required margin would be even lower (1/20 of $1,000 = $50). But keep in mind that the higher the leverage, the higher the risks of getting liquidated.
Apart from the initial margin deposit, you’ll also need to maintain a margin threshold for your trades. When the market moves against your position, and the margin gets lower than the maintenance threshold, you will need to put more funds into your account to avoid being liquidated. The threshold is also known as the maintenance margin.
Why use leverage to trade crypto?
As mentioned, traders use leverage to increase their position size and potential profits. But as illustrated by the examples above, leveraged trading could also lead to much higher losses.