What is Leverage Trading?
Also referred to as margin trading (the two terms can be used interchangeably), leverage trading refers to the act of borrowing funds to amplify potential returns when selling and buying cryptocurrency. By leveraging a trade, you can access greater buying power and have the opportunity to open positions that are much bigger than your actual account balance.
For example, if you have an account balance of 3 BTC and want to trade with leverage of 10:1, you can open a position worth 30 BTC. This means that if the market goes in your favor, you can access ten times the profits. However, the losses can be big if the market moves against you.
Leverage trading is not usually suited to beginners but is best left to experienced traders because it is risky, complicated and speculative.
Drixx is a popular cryptocurrency derivatives exchange that allows its users to trade with leverage of up to 100:1, providing traders with the opportunity to amplify their gains, as well as potential losses. We also offer our retail users the chance to trade on various instruments via a peer to peer matching engine. Users can sign up, deposit and immediately trade on our deep liquidity and tight spread markets.
Why Leverage Trading?
Leveraged trading enables confident and experienced traders to open potentially much more profitable positions than they could otherwise access. For example, A successfully closed position with 100X leverage will yield 100 times more profit than an open position obtained through a “normal” trade.
Leverage trading Bitcoin and other cryptocurrencies also enable strategic traders to generate more profit in a bear market by opening short positions. For example, a trader who anticipates a significant price drop could potentially commit part of his portfolio in a short position to generate a profit that outweighs the potential loss suffered by a large price drop if closed successfully.
One of the advantages of leverage trading is that it enables you to turn a bear market into a profitable opportunity potentially. For example, let’s assume you had 1 BTC in 2017 when its value was over $18,737. In the hope that the market would collapse, you sold this BTC at this high price to repurchase it later at a much lower price. If you had then decided to redeem the BTC when 1 BTC was worth $ 6,695, you could have made a profit of $ 12,042 (excluding transaction fees).
This potential profit could have been much higher if you had added leverage trading to it. If you had traded with a leverage of 3:1, your profit would have been three times that. It is this much higher profit potential that makes leverage trading an attractive prospect for seasoned traders.
How Does It Work?
Different exchanges impose different limits on the amount of leverage available. Drixx offers leverage of up to 100:1 on most contracts. However, the amount of leverage you can access mostly depends on the Initial Margin (the amount of BTC you need to deposit to open a position) and Maintenance Margin (the amount of BTC that needs to be in your account to keep a position).
You have two options when leveraging trading cryptocurrencies:
Going long: Going long means buying a contract because you think it’s value will increase or go up.
Going short: This is when you sell a contract because you think its price will reduce or go down, and then you can repurchase it at a reduced price at a later date. Shorting is often used by traders that want to profit from falling crypto prices.
When you open a position, part of your account balance is held as collateral for the funds you borrow from the stock exchange. If your trade is successful and you close the position with a profit, your collateral is returned to you with those profits minus the fees. However, if the market moves against you and you incur losses, your trade will automatically close, and your collateral will be liquidated when the market reaches a certain price. This is called the liquidation price.
When leverage trading, note that the exchange you trade on will hold collateral for the capital you borrow. If you successfully close a position with profit, the exchange will release the cryptocurrency you deposited to open the position, including any profits you’ve accrued.
However, if you experience a loss while leverage trading, the exchange will automatically close your trade and “liquidate” your position. This usually happens when the price of the digital asset that you are speculating on reaches a specific threshold, known as the “liquidation price.”
Risk Management Tips
Leveraged trading is risky and complicated, but these simple tips will help to minimize your risk:
Practice makes perfect: Drixx offers a practice environment known as a demo account that feels just like the real thing. This enables users to get familiar with placing, executing and cancelling orders while interacting with a simulated marketplace. Get used to how things work here before trading with real funds.
Start with a small amount: When you start trading with leverage, deposit only a small amount into your account. This way, if you mistakenly make a bad trade the market moves against you, you can minimize your losses.
Limit your leverage: Don’t be fooled by the maximum leverage potential available. When starting, minimize the leverage you use, because it will help limit your risk.
Choose a specific market: Instead of expanding into several different markets, focus on a particular market (e.g., XBT/USD). This will give you a better understanding of trends and price movements.
Understand your order: When setting up your first trades, you must study and understand the order screen. Pay more attention to the “Cost” field as it shows the maximum amount you could lose from your trade.
Allow experienced traders to handle it: If you are new to trading cryptocurrencies, leveraged trading might not be the best option for you. However, If you know what you are doing, taking advantage of Drixx trading options can be a useful tool to help you increase your profits. Also, ensure that you understand all the risks involved before deciding if this is the right approach for you.
Cryptocurrency Leverage Trading Strategies
The crypto market is extremely volatile compared to forex markets and other traditional securities, thus carrying additional risk factors.
Below are several important strategies and practices that you should be aware of before leverage trading Bitcoin or other cryptocurrencies:
- Gradually Increase Trade Size – If you are still new to leverage trading, it’s essential to develop a good understanding of the practice by starting with smaller positions and lower leverage.
- Start with demo trading – Demo trading allows new traders to “practice” trading in a virtual trading environment. In demo trading platforms, you don’t need real money, but it still reflects the actual market prices. Demo trading enables newbie traders to put their strategies into action without risking their capital.
- Understand Order Types – Margin traders frequently use combinations of order types like take profit and stop loss to open complex positions and minimize risks. These types of orders can help by setting specific profit or loss targets and automatic closing positions.
- Divide your position – Minimize risks by dividing a position into separate tranches. Creating a scale of take-profit levels allows traders to capture profits gradually.
- Watch out for fees and interest – Bitcoin leverage exchanges do not offer free leverage. When you open a leveraged position, you will pay interest on the principal you borrow. Margin trading of Bitcoin and other cryptocurrencies generates ongoing fees that can quickly reduce profits.
- Let your objectives be clearly defined to minimize risks – When leverage trading, it’s necessary to follow a specific risk management strategy that sets a clear profit target – and follow it judiciously. It is also essential to set stop loss levels and stick to an exit target.
- Focus on the fundamental and technical factors – Movements in the cryptocurrency market are mainly due to the technical elements. This is partly due to a large number of active traders within the crypto ecosystem who trade based on technical analysis. However, fundamental factors can have a profound and sudden impact on the prices of cryptocurrencies. Regulatory changes, significant moves in the Bitcoin wallet, and major exchange tips can catalyze large price fluctuations.
If your trade is successful and you have invested in one of the best stocks in the market, and you close the position with a profit, your collateral is returned to you with those profits minus the fees.