The key attraction of crypto trading is astronomical profits. And Leverage Trading could be claimed to be the gateway to grand profits in crypto, or for any trading vehicle for that matter. The crypto world has largely borrowed multiple trading strategies from the traditional trading world but when it comes to potential of mammoth profits- it’s Leverage Trading that takes the cake away. But is it worth trying Leverage Trading in the crypto world?
Well, the question is inevitable especially when we are talking about Leverage Trading with cryptocurrency. Crypto still flaunts a Wild West scenario with its erratic volatility and huge losses are as common as dramatic profits you see with crypto trading. And, Leverage Trading too can leave you with terrible losses. However, that has not been able to prevent ambitious crypto traders from trying out Leverage Trading. But would it be suitable for you? Now, that depends on a list of factors, such as your risk appetite, your margin capacity, your choice of crypto, your trading behavior, and so on.
The post below will help you to gauge whether Leverage Trading with crypto would be a compatible option for you.
Why do ambitious traders prefer leverage trading?
Well, the reason is simple. Leverage Trading not only allows one to aim for higher profits with bigger trading positions but also with less trading capital from the trader’s personal share. So, how do leverage traders open large trading positions when they are slightly short on capital? Well, it’s through borrowed funding. The Leverage Trading platforms, say the crypto exchanges, help out with the rest of the capital needed for opening larger trading positions. Crypto exchanges enable traders to choose from a wide range of leverage, say 1x to even up till 100x.
You should also understand the concept of margin as well when we are discussing Leverage Trading. You will have to deposit a certain amount while you would open your Leverage Trading account with your chosen crypto exchange. Then, you will have to maintain another margin amount to keep the trading position alive. This margin amount is your collateral against which the crypto exchange will offer you the additional bandwidth to open larger trading positions.
Understanding profit and loss in leverage trading with crypto
Let’s say Bitcoin is now trading at around $30,000. Although you can buy a fraction of BTC easily, you want to buy 1 full BTC this time to aim for higher profits. Now, the problem is, currently you would be able to allot just $3,000. Now, if you go for any other crypto trading strategy than Leverage Trading, you would have to pay full $30,000. But with Leverage Trading, you can deposit $3,000 and the rest of the amount ($27,000 with 10x leverage) you can simply borrow from your crypto trading platform.
Now, let’s discuss the scenario of profit with Leverage Trading with crypto.
As you won’t be able to afford more than $3,000, you will have to open a $3,000 worth trading position only if you go for any other crypto trading strategy than Leverage Trading. Now, if the coin rises by $3,000 and reaches $33,000, the profit will be 10% for your account.
But, in the case of Leverage Trading, the profit would be 100% for the trader as here the profit will be calculated on $33,000- even when the trader could only offer $3,000 from his personal share. It’s self-explanatory why Leverage Trading is claimed to be the gateway to higher profits.
Now, let’s discuss the scenario of loss with Leverage Trading with crypto.
What if the coin takes a dip and drops to $27,000 from $30,000? In that case, your loss would be just 10% if you go for any other crypto trading strategy than Leverage Trading. But, if you are trading crypto with leverage, the loss would be a whopping 100%.
Worse, with 100% loss, the maintenance margin would get liquidated and you would immediately receive a margin call from your trading platform. This is a warning call that will ask you to refill the margin amount immediately, lest the whole trading position would be shut down. Again, it’s self-explanatory why some traders try to avoid Leverage Trading.
Should you try?
Well, why not? But since Leverage Trading also runs the risk of liquidating your margin in just a moment, you have to be a little cautious. Here are some tips that will help you tread the road to Leverage Trading with crypto with confidence and safety.
Less leverage level
Even though trading platforms offer up till 100x leverage, there is no need to aim for higher leverage levels. You cannot amplify your wealth with one single trade- the smarter way is to grow it slowly but steadily with decent profit over time. So, go for low leverage, such as 1x or 2x. This way, it would be easier to manage the losses, if you encounter any.
Mind the exit time
Overtrading is one of the biggest reasons behind huge losses in Leverage Trading. And, it happens both when the trader is making profit and encountering loss.
Set a target bar for profit. Once you reach that bar, just stop trading for the time being. Don’t fall prey to the habit of overtrading just because you think the market is swinging in your favor now. The market might take a downturn any moment.
Then, you should also set the bar for loss while trading. If you are losing, you will have this natural urge to keep on trading till the market changes in your favor. But, what if it is taking a longer time? If you keep on waiting, you might lose out more than you could have imagined- while waiting for the slightest chance of profit. So, set a bar for maximum loss as per your loss appetite. Once you reach there, exit your trade for the time being.
The fees
Always check the trading fees while choosing the platform for Leverage Trading. Your chosen one should assure reasonably affordable fees.