Modern exchanges are equipped with such extensive functionality that they are far from being limited to the provision of trading services and make it possible to receive passive income.
Margin trading is prevalent among crypto traders dealing with cryptocurrency speculation. Such transactions with digital coins quickly increase the amount of capital available. However, the profitability of margin trading is characterized by significant risks accompanying its application. Professional crypto traders, knowing the nuances of marginal crypto trading, can minimize possible losses while earning big money at the same time.
What is margin trading?
The term cryptocurrency margin trading means a specific option for conducting trading operations in which assets are virtual currencies. Such transactions are carried out on special trading platforms called crypto-exchanges.
Margin crypto trading differs from traditional operations in an extremely significant feature of the speculator so that it earns more, uses personal and borrowed funds. The trader borrows the required amount of borrowed money from other cryptocurrency investors or from the exchange itself. The pledge is its existing assets on the trade balance.
Using borrowed capital, a crypto trader can open orders with a large volume of virtual currencies. It directly determines the amount of potential profit.
The nuances of margin crypto trading
It is advisable to consider the functioning of cryptocurrency trading with margin using a demo example. Presumably, the crypto trader has an initial capital of $120. At the same time, he confidently assumes a rapid increase in the value of specific altcoins. Knowing such data, a trader wants to quickly acquire crypto coins to subsequently wait for their price growth and sell them at a profit. A trader on the exchange takes a loan to buy the desired volume of the selected crypto asset.
The amount of money that a cryptocurrency exchange can give a speculator with $120 borrowed is determined by its policy. The marketplace regulates specific leverage for different conditions. When the leverage is set to 1:20, the trader has the option to leverage $2,400 on a trade. The trader will receive a profit, from which the borrowed funds plus a small commission will be deducted in the event of a real increase in the price of the purchased for this the amount of the selected cryptocurrency. However, the total income of the speculator will be 20 times higher as a result.
- The amount of commissions for providing the margin and the leverage itself are set individually on different exchanges. Everything is due to the peculiarities of the functioning and the established policy.
- Quite often, the trader’s assumptions and forecasts are not justified with margin crypto trading, and the purchased coins, on the contrary, are getting cheaper. The speculator will lose his funds, and also from the amount of the pledge will cover the losses of the exchange floor or reimburse the damage to the investor who borrowed the money.
- If a trader enters deals fractionally, then unsuccessful positions will quickly nullify his trading deposit than with the option of trading without leverage.
- When the value of the loss exceeds the collateral amount, automatic closing of transactions begins cryptocurrency exchange. The broker forcibly gets rid of the crypto trader’s open positions to recover the collateral. A speculator in such an uncontrolled situation usually loses the entire deposit.
- As soon as the amount of losses becomes critical, but the collateral amount has not yet been reached, the system sends a special warning from the crypto exchange, called a margin call. This scheme is relevant for trading platforms.
- After the message about the imminent zeroing of the balance, the trader needs to quickly replenish the deposit so that the broker does not start closing active orders by selling the purchased coins.
Secrets of successful margin crypto trading
According to practical observations, the effective cryptocurrency margin trading is directly determined by a trader or investor’s degree of professionalism. Tactical solutions used in crypto trading do not have cardinal differences with strategies. Successfully practicing in the classic trading of fiat currencies on Forex or assets on stock exchanges. A speculator on the crypto market can open orders to buy a cryptocurrency or sell, focusing on calculations and assumptions of selected coins’ subsequent price movement.
Experienced crypto traders have formulated a chain of simple principles, following a real opportunity for stable receipt of large profits with margin trading in virtual currency. Here are some tips from professional traders:
- Never push the situation to a margin call. You should learn to stop a series of unprofitable trades in time. As a rule, professional traders complete trading operations when they lose 27-31% of the deposit. When there is justified confidence in the imminent rise in the price of purchased crypto coins, you can also replenish the trade balance to prevent a margin call.
- Before using the margin trading opportunity, you need to understand in detail the nuances of commissions. Often, payments for the use of borrowed funds are made on a daily basis. Due to these features, clear adjustments in actions and amendments to the trading strategy are required to use the minimum time period when trading cryptocurrency. This way, additional financial losses are minimized.
- You need to look for virtual currencies to make money scrupulously and extremely responsibly. Option with altcoins, characterized by a significant volatility level, is not very suitable for margin crypto trading because the risk of a quick zeroing of the deposit is extremely high. Digital coins that show high volatility in trading sessions are preferable to be used in speculation without the use of leverage.
- You should consider the source of collateral when trading on margin and control their volume. These are assets on the trading balance of a working crypto trader. Moreover, it is essential to control the state of a trade deposit to prevent it from being reset. It requires continuous analysis of cryptocurrency quotes in the presence of open positions and timely control of the available amount of collateral; otherwise, you will lose all capital almost instantly.
How to make money on a crypto exchange by trading?
Trading is the process of exchanging one asset for another to generate income. Crypto traders use different strategies that differ in how they work and the trade frequency to maximize profits.
Trading as a method of earning money is used for all types of assets, but it has received a new life with cryptocurrencies due to their high volatility. With the right skills and a good combination of circumstances, you can get very high profits. Sometimes the growth of the coin rate reaches hundreds of percent in a matter of hours. However, the risks are just as high.
You need to develop your own strategy and stick to it to make money trading.
Examples of trading strategies for trading cryptocurrencies:
- Trend attack. Trading is carried out only along with the trend, that is, in the rate movement’s direction. Continuous movements along the trend help the trader to earn and cover losses.
- Thriller. Suitable for any asset and provides many signals, which increases the convenience of the trader and the range of possible actions. You may come across negative trades during a sideways movement; however, with a pronounced trend, they will overlap.
There are many other strategies, as well. You can combine most of them into one scalping concept; this is high-frequency trade in which transactions are made every minute. Thus, the calculation is not made on large profits but many small incomes.
Technical and fundamental analysis is a must for making a profit.
- Technical analysis helps predict where prices will go in the future using historical data in the process, analyses the crypto price graph for the period, and correlates each of their changes with certain indicators that affect course jumps. Technical analysis helps determine the optimal conditions for opening a position in the market, that is, buying and selling cryptocurrency.
- Fundamental analysis works in a completely different way. In the process, an assessment is made of economic, technological, and political factors that may affect further changes in the crypto market state. With such an analysis, it is possible to identify assets that have long-term prospects and thus are suitable for long-term investments.
Trading cryptocurrencies on margin represents a chance for a good and relatively stable income. An experienced crypto trader using leverage can have a steady profit in virtually any financial market, especially on crypto exchanges. This tool allows you to increase your capital without increasing your trading deposit. However, margin trading is extremely risky. This aspect is relevant for novice speculators or traders who illiterately control risks. You need to prudently use the margin in crypto trading, as this market is specific and highly volatile. An accurate analysis of exchange situations, a competent choice of digital assets, and alerts are the basic minimum that can give a trader an income. If used carefully and correctly, the margin trading of cryptocurrencies will definitely make trading activities effective and successful.