Trading with cryptocurrencies has never been easier or more accessible. However, an unavoidable challenge of trading cryptocurrencies is their extreme volatility as an asset class. The price of a cryptocurrency can fluctuate enormously over the course of a day, hours even. By utilizing leverage trading, traders can take advantage of these fluctuating prices to turn a profit. Get it wrong, though, and leverage trading can also amplify your losses
What Is Leverage Trading?
Leverage trading, also known as margin trading, gives traders increased buying power by enabling them to borrow funds in order to amplify their current position and unlock bigger payouts than would otherwise be available.
Let’s say you have 100 USD in your trading account. Using a 3:1 leverage trade, you can open a trading position as if you had 300 USD to invest. If this position pays off, you will earn 3 times the profits. However, if the trade goes bad then you will amplify your losses equally.
Needless to say, leverage trading is a risky way of trading cryptocurrency; it isn’t something that beginners should attempt. Before you explore high-risk options like leverage trading, you should first master the basics of trading cryptocurrencies and gain some experience. This beginner’s guide from easyMarkets is a great place to start.
How It Works
Different exchanges set their own limits on the amount of leverage available. When you make a leveraged trade, you are essentially borrowing funds from the exchange to add to your own. There are several factors that affect amount of leverage available and the precise figure will vary between exchanges.
There are two options available when you leverage trade with cryptocurrencies, going short and going long. Going long is the position a trader takes when they expect the contract to increase in value. Going short is when you sell a contract in the expectation that its price will go down and then purchase it against at a reduced price later on.
The most important thing before you begin margin trading is to research. Leverage trading can produce significant returns, but it can also end in crippling losses. It is essential to properly understand what you are getting into beforehand. It is also worth taking things slowly to begin with and starting out with relatively modest leveraged trades. Once you are more confident in your abilities and you have a firm grasp of what’s going on, you can then begin to take bigger risks.
Most experienced leverage traders also recommend that you aim to resolve your leverage trades as soon as possible. You shouldn’t be holding these positions for more than a month or two.
Leverage trading with cryptocurrencies can be a very lucrative way of approaching cryptocurrency trading, but it also raises the chances of incurring serious losses. This isn’t something that you should attempt if you can’t afford for your trades to go bad. Make sure that you always have an awareness of your available funds and don’t exceed your limits.