2018 Beginners Guide Cryptocurrency Margin Trading

Exchange | Fundamentals | Technical Analysis | Trading

 

So you’ve been hearing a lot of hype about the highly profitable world of crypto margin trading.  You probably stumbled across this guide because you need some real insight into what you should expect. If you’re looking for an unbiased review and guide on how to get started, you’ve come to the right place.

What Is Margin Trading?

Margin trading allows users to trade with money they don’t inherently own by leveraging their position with borrowed money. Can 2-100X your initial deposit with this temporary loan. So for example, if we had an open position at 2X leverage with $50 of your own money, we would also trade with another $50 from a “lender” off the exchange, totaling $100.

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Standard position trades are traded at a leverage of 1:1. With leverage trading you can double, triple, or even quadruple your leverage, thus exponentially increasing your profits (or losses).

PRO TIP:  limit your potential losses by implementing a stop loss with every margin trade. We cover more on the stop loss topic here.

Margin trading allows anyone to open a position with more money than they actually have. You can imagine, this can be a “double edged sword” depending on your trading experience and technical analysis skill set.

Let’s look at a real world example…

Say you opened a leverage position with $100 of your own money. If you 2X your leverage then you’ll receive another $100 from the exchange bringing you to a total of $200. If the cryptocurrency your trading drops by 50%, it’s now worth $100. You essentially just lost the exchanges borrowed money and have to pay them back with the $100 of real cryptocurrency you just deposited, plus interest.

You’re essentially doubling, tripling, etc. your profit or loss percentages. If the cryptocurrency goes down by 10%, you really just loss 20%, however if it goes up 20%, you just gained 40%. Either way you look at it, you’re risking more to make more, and at a much faster rate.

Margin trading allows you to make larger bids than you presumably would be able to afford, at the cost of extra fees and risk.

The Risk And Reward Of Margin Trading

risk-vs-reward-margin-trading-cryptocurrency

There is an additional cost to margin trading in the way of interest. Paying interest on the borrowed capital (it could be the exchange or other users) can differ from one exchange to the next. The maximum amount that you can lose is the amount that you originally invested into the position, so if your coin goes down by 50% and you’re at a leverage of 2X, then you just lost all your coins.

This is also referred to as liquidation value. This value, is what the exchange automatically closes your position at. It’s there to ensure that you don’t lose any of the lenders money (or the exchanges).

Again, in the example we used above, if you lost $100 of your $200 position, then your trade is essentially closed by the exchange because you just lost all of the lenders money. However, in reality your position would close at around the $90-$95 mark, as you have to pay fees on the borrowed money.

Short and Long Positions

Most people know what a long position. It’s a very simple concept to comprehend. You look for a place to “buy the dip” and if it goes up 10% on $100, you now have $110. Simple right?

A short position is a bit more difficult to understand, however just know that this is a trade where you expect the price to decrease. If you think that a particular cryptocurrency is about to drop you could open up a leveraged “short position” by telling the exchange to lend you additional currency so that you can buy it back later at a cheaper rate.

In other words, if you open up a 2X short position with $100, and it went down 50%, you would earn $100, thus coming out of the trade with $200. If the trade went up 50% then you would have lost $100 in the exchange which would automatically close out your position.

Quick Tips For Margin Trading

  1. Managing your risk – before margin trading make sure that you have established a clear set of rules as to which you are willing to abide by. This should work for both profit and loss scenarios. Write them down if you need to and post them on a sticky note as an added reminder. Always set a stop loss as well. Find out more about stop losses here.
  2. Get in and get out of a trade – Trading within cryptocurrency market is already considered extremely volatile, however margin trading doubles that risk. Only use margin trading for short-term trades (aka – scalping). In the long term the fees of holding a margin position can amount to a significant sum, so no hodling here.
    PRO TIP: there’s generally a set time limit on margin trades. If you can’t execute your trades within the time limit, the leverage portion of your trade will be settled once that time limit has expired, regardless if you’re ready for it or not.
  3. Look for extreme fluctuations (volatility) – look out for deep price fluctuations as they tend to bounce quickly. When price action dips, look for a turnaround point using candlestick patterns or significant chart patterns.  Time a leveraged buy according to your T.  Also make sure you have at least 3 indicators or chart patterns that back up your strategy. I won’t get into the details here, but you can check out our trading section for more.

What Exchanges Offer Margin Trading?

  1. Cex.io (users who click this link and sign up will receive a 10% discount on their fees for 6 months) This is a great place to get your feet wet with margin trading. Compared to other margin trading exchanges, it has a very intuitive interface, so it’s rather easy to use.

  2. Bitmex is for those who are more advanced traders (which you should be before even considering margin trading) and offers much higher leverage options like 100X. Bitmex has a great reputation with many traders and is one of the leading margin trade exchanges within the crypto sphere.

  3. Bitfinex has the largest trading volume of bitcoin within the . US. The market offers margin trading at a leverage of the 3.3X. The user interface is very simple to understand for novice traders. This is also a very popular margin trading platform you’ll hear most traders speak about.

  4. Kraken – is a US-based cryptocurrency exchange operating out of Canada. They offer a full 28 day margin trading term and allow you to leverage up to 5X.

  5. Poloniex is the largest and one of the oldest margin trading exchanges. You can leverage trade up to 11 altcoins at a time. Leverage trading however is only available at 2.5X. There are also relatively high interest fees from lenders when playing short positions.

Should You Margin Trade?

I strongly suggest you stay away from margin trading unless you have a lot of experience trading and a  fundamental understanding of technical analysis. Trading is stressful enough without having to worry about borrowing someone elses money This will only magnify your stress if you don’t know what you’re doing.

You can easily wipe out your entire trading capital with margin trading, if a coin suffers from a dramatic dip. If you’re simply trading a long position (with your own money), you can always recoup those costs in time by holding onto the coin (aka holding bags) in order to recover your funds.

However if you’re a “logical” risk taker with lots of trading experience and have always wanted to give margin trading a chance…..then go for it. Make sure to read over all the margin trading ratios and calls within documentation of any given exchange that you’ll be trading on before taking that dive.

For the latest “easy to follow” crypto trading guides, visit the trading guide section here.

Detailed Video Guide to Margin Trading

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