With leverage trading, you can earn more with less. You can multiply your position multiple times over, which in return multiplies the potential profits too. This depends on your prediction coming true.
In the world of digital currencies or in any other traditional financial market, leverage operates like a loan. Your digital currency exchange offers you a bigger position size on the basis of the collateral you can provide. Collateral here refers to margin and leverage can be accessed in various multiples of margin funds from 2X, 5X, 10X, and so on. Read here more about Multibank.io.
For instance, you may be on an exchange that allows 10:1 leverage to beginners and thus, you can trade up to 10X of your starting investment which would bring you 10 times more profit.
So when you put $1,000 into Bitcoin, a 10:1 leverage will bring you $10,000 in return. When you sell the asset to return the funds you borrowed, you will still have profits to take.
What if things go wrong?
If the market does not move in your favour and registers a dip by say 10%, the platform would start a margin call. This would close your position and liquidate your margin amount as this 10% dip on a position where you have used leverage would indicate a 100% drop in your margin amount.
Leverage trading has this risk which can amplify further if trades are rolled out without proper research and planning.
How to choose the right leverage?
- Don’t start with a huge amount or leverage
There is a good chance that the prices may not be in your favour and thus you should start small. If you don’t want to lose your investment, this is the best approach to keep your losses in check until you get the hang of the market.
Avoid the temptation to take 50X leverage on a $10,000 investment. There is a good chance that it may not end up well. Rather, keep your investment and your leverage amount small especially if you’re still learning the tricks of the trade.
- Stay updated with the news
Say you’re speculating on the price of Bitcoin and how it will shape up in the future. You should then look at all the different factors that can affect the price and stay updated with the latest news. Remember that even the smallest unwanted update could change the price of your asset dramatically.
Say a new company announces that they will start accepting Bitcoin as a mode of payment or some fresh set of government regulations come into play. These factors could come into the picture unannounced so you should know when to be smart about using leverage.
- Use stop loss
A stop-loss is a great tool to mitigate losses and it is something that one should have in place considering how volatile Bitcoin prices can be. But do bear in mind that it cannot be under your starting capital as the rates could dip. You should know how to balance your finances and to do this, you should be able to understand how stop loss works in margin trading. It’s a safety check that can be quite handy.
- Take profit
Getting caught on the trading trend can be easy especially when the market is on a bull run. But you should know when the time is ripe to exit the market with profit. Several investors have had a bad experience waiting for the funds to grow for longer than they should have. If you feel that you have earned considerably, it may be wise to exit the market or you may face a sudden drop and end up losing all your investment.
Trading strategies and leverage
As a rule of thumb, leverage factor and time of trade need to be inversely correlated in margin trading. For instance, a scalper could opt for a 10x or even 25x leverage while a swing trader may want to play it safe with 2x or 4x leverage.
Such an inverse equation can be seen often as it brings the best risk-to-reward ratio for both scalpers and swing traders.
Scalpers: high leverage, short timeframes
The traders who use scalping as a trading strategy, operate between 1-minute and 5-minute charts. They find entry and exit points in high volatility markets in the short term and make the most of small sub-1% movements with more leverage.
For instance, a trader who has USD5,000 uses 25X leverage and can open a position of USD125,000. A 0.5% price movement will create a profit of USD625, which means a 12.5% profit for the investor.
Swing traders: low leverage, long timeframes
Look at the same scenario with a 2X leverage. From a leverage of 25X that brought $625 as profit, here you would gain only $50 if the market moves 0.5%–which is insignificant for a swing trader. Know that when it comes to volatility, every asset can be unique. For instance, Bitcoin’s volatility is entirely different from that of Ethereum or Dogecoin. Hence, it helps to carry out some research and understand how the asset typically behaves.
Swing traders operate between 4-hour and 1-day timeframes. They are traders who opt for a mid to long term trend that has low or zero leverage. A swing trader who has $5000 as capital and a 2X leverage can open a position worth $10,000.
A 15% movement in the price will then mean a profit worth $1500, i.e a 30% gain that a trader can earn. Swing traders could maintain this position for a long time for days or maybe even weeks. Hence, low leverage can help in preventing accidental liquidation in the market.
Conclusion
Digital currency margin trading could be profitable and beneficial if done smartly. But it helps to know that just like the various other types of trading, margin trading also comes with its own set of risks, which must be considered especially when dealing with a digital currency as volatile as Bitcoin.
However, it is possible to turn the odds in your favour. Follow the guidelines we shared above and you’d keep your funds safe from rookie mistakes!
