What is margin trading?

Margin trading is a form of leveraged trading that utilizes margin. With leverage, you can open positions larger than your account balance. By "borrowing" funds from the exchange, you can increase your purchasing power and open positions with a small initial investment, without having to pay the full amount initially required.

It is also known as leveraged trading. "Leverage" refers to the ratio of the position value to the required investment. In the cryptocurrency market, this ratio typically ranges from 2:1 to 100:1, and the trading community often uses the letter "X" (2X, 10X, 50X, 100X, etc.) to represent this ratio. The higher the leverage used, the greater the potential profit. For example, if the prediction is correct, a trader opening a position with 100x leverage will have 100x the risk exposure and potential profit.

Margin Trading

Initial Margin

Traders need to deposit a certain amount of margin to open a position when engaging in margin trading. For example, if you open a position using 0.01 BTC (worth $540) with 100x leverage, your position will be worth 1 BTC (equivalent to $54,000). The higher the leverage a trader uses, the lower the required margin.

Going Long or Short

Cryptocurrency margin trading allows you to open both long and short positions. A long position means the trader anticipates the cryptocurrency price will rise, thus opening a long/bullish position to seek profit. A short position is the opposite. The trader believes the price will fall, thus opening a short/bearish position to profit from the price decline.

Advantages and Disadvantages of Margin Trading

Leveraged trading amplifies your profits but also increases potential risks. Fortunately, the increased risk in cryptocurrency margin trading is not proportional to the leverage. In short, your maximum loss is limited to your account balance.

Furthermore, for beginners, due to the greater volatility of the cryptocurrency market compared to other markets, especially with margin trading and different leverage ratios, it is recommended to learn and practice before entering the cryptocurrency market. Just as you learn to walk before you learn to run, users should learn how to set stop-loss and take-profit orders to ensure profits and prevent potential losses. Technical analysis is also widely used by many traders to predict market trends.

Margin Calls and Forced Liquidation

A margin call is triggered when a trader's margin account balance falls below the maintenance margin requirement. The trader needs to deposit funds or close part of their position to meet the margin call requirement. If the trader fails to meet the margin call requirement, the exchange will liquidate the first position and then subsequent positions until the margin level is above the requirement.

For example, if you lose 70% of your account value, you need to add margin; otherwise, the system will automatically liquidate positions in the order they were opened. This process is called forced liquidation due to failed margin calls.

Bittam provides you with a trading demo with 100,000 free USDT so you can practice your strategies and familiarize yourself with the crypto market before starting margin trading.