Sooner or later many traders face the problem of lack of capital to move to a higher league. A good strategy, and understanding of the market, does not always help to quickly grow profits, without the ability to inject new funds. In this case, margin trading looks promising.
What is margin trading
The essence is the provision of borrowed funds by the broker, which the trader can put into business. It is similar to a loan for the purchase of a certain financial product. There is another name for margin trading – leveraged trades.
Leverage is the ratio of own funds to the total value of the asset. For example, if it is 1/2, then the share of trader’s money in the deal is equal to 50% – the rest is allocated by the broker with the participation of dealing centers. When it comes to cryptocurrencies, leverage can reach 1/10, 1/20, 1/50, etc. There are platforms that offer up to 1/1000, which means you can make a deal that is a thousand times the capital in value.
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The main condition for making a deal is the presence of own funds at the trader. Without them and registration in the system with verification (KYC), the loan will be refused.
Advantages of margin trading
The main advantage, it is also the most obvious: with the right strategy and understanding of cryptocurrency market movements, you can achieve excellent profitability even with a small initial capital. The greater the leverage offered by the broker, the more substantial the profit.
Other pros of the solution:
- At first glance, the method may seem quite risky, but investors are actually in a pretty secure position. Since margin trading is primarily used for highly liquid first-tier assets. There is no need for a broker to take a risk and offer leverage when it comes to obscure tokens.
- Nobody forbids to allocate assets within the portfolio. In this way, security is increased and investments become more reliable. The probability that the market will collapse simultaneously in all directions is extremely low. Diversification in case of margin trading has not been canceled.
- The leverage equalizes traders with small capital and professionals. It opens the door to serious deals and large volumes.
Specialists note that in the presence of a well-tested strategy with a positive overall result, margin trading is a chance to dramatically increase your profits without additional financial injections.
Disadvantages of margin trading
There is no perfect solution, any promising directions have pitfalls that cannot be ignored. In the case of margin trading, it is worth noting the following disadvantages:
- The higher the potential profit, the more tangible the risk of losing all the funds. The prospect of parting with all the capital in margin trading is more real than when working with your own assets. If you do not use leverage, there is always a chance to save at least part of your funds.
- There is a probability that a trader will not only lose money, but will remain indebted to the broker. This is possible when the leverage is too high, the forecasts did not come true, and the position was not closed in time. Yesterday there was some capital, and today there are only debts.
- Not every asset is available for margin trading. Moreover, the list of cryptocurrencies and the size of leverage is determined by the broker himself, and he can change the conditions at his discretion depending on the market situation. Investors are most often deprived of potential profits by such manipulations.
- The commission will have to be paid in any case, even in case of unsuccessful investments.
- Trading is possible only in one direction – either up or down. “Narrow throat” limits the possibilities when trading.
The main rule: it is impossible to trade for amounts that a trader is not morally ready to lose. It is also worth to always increase the level of knowledge about the market and follow your own developed strategy. Only then risks can be leveled.