Margin Trading and Leverage: What are They and How Can I Get Started

How do you trade crypto if you don’t have a lot of money?

This problem is more common than you think – You see the price of an asset rising and you want to get involved.

You might think that there is going to be a big difference between the opening and the closing price (which is how you gain on SnapEx), but you feel limited because you don’t have buying power.

Fear not, that’s where leverage and margin trading are here to help!

Ok, can you give me a definition of margin trading and leverage in one sentence?

No problem! That’s exactly what we are here to do.

Margin and leverage refer to borrowing from a broker to increase your ability to trade more, which opens up the possibility of greater profits.

Before you consider leverage and margin, however, you’re going to need a step-by-step guide on how to do it, and you also need to have a greater understanding of the risks involved with leverage and margin.

You referred to leverage and margin – What are the key differences here?

Ok, so that’s where we need to go into a little more detail.

Let’s start off by talking about Margin Trading:

Margin trading involves borrowing money from a broker or a third party in order to trade. This is useful when your starting capital is smaller than you would like, but you want to fully participate in the cryptocurrency markets. Just say you thought the BTC market was going to go up or down, you could borrow funds from a broker to participate in the SnapEx Contract for Differences (CFD) function and place your position. You could then profit based on how much you borrowed, but you could also lose, which is something to be mindful of and why doing adequate research is crucial.

Ok, so what about Leverage – What is it and how does it work?

After borrowing the money for margin, that’s where leverage comes into play. You contribute a certain proportion of the total value of the order you are placing, more often than not at a ratio of 1:10, 1:20, 1:30, etc.

This allows you to be in a position where you are able to make greater gains (on the flipside, also bigger losses) in a way that enables you to profit from cryptocurrency’s volatility.

With the Contract for Differences trading function, you are able to benefit and gain when the price goes up, and when the price goes down; margin and leverage both allow you to take full advantage of these price swings, be it in the cryptocurrency or the stock markets.

Let’s give a real-world example: If you have $1,000 to trade on BTC, but you want to invest $10,000 to maximize your gains and you wanted to do it at a margin of 1:10, you would be able to trade as though you had $10,000 from having $1,000.

If it was unleveraged and you wanted to trade $10,000, you would need to have $10,000 in cash upfront. That’s a huge amount of money, and that’s the advantage of leverage.

What can I do to manage the risk involved?

The good news with leverage and margin is that there a number of strategies exist to mitigate risk and prevent losses and manage your crypto risk.

Stop Loss: This is a tool that is designed to prevent any further losses after your portfolio goes south and your funds are negatively impacted. Let’s take an example: If you do a 1:10 leverage and the maximum you want to lose is $1,000, you would pre-emptively set your stop loss to $1,000. It’s that simple.

Take Profit: We all know that crypto is a highly volatile market, and you need to optimize the time you cash out. After your profit hits a certain amount, you are able to cash it out at a time of your choosing. It doesn’t matter if it goes up or down afterwards, what matters is that you got the profit at the time of your choosing.

Don’t risk more than you can afford to lose: This is the number one rule of investing. Regardless of the amount you are investing.

What are the Pros and Cons of doing leverage and margin with cryptocurrency?

We’ll start off with the pros of doing margin and leverage with your cryptocurrency portfolios. Firstly, you have a lower barrier to entry, because you are able to trade with lower funds. Secondly, you are able to diversify to a greater degree and increase your profits drastically by entering in with smaller funds.

So, how about the drawbacks? If you’re relatively inexperienced, doing margin and leverage can be relatively difficult and given that crypto is such a volatile market, you can always lost money if your risk management measures aren’t good enough.

Ultimately, it comes down to a key concept: Practice, practice, and practice.

Gradually increase the time period of your trades, divide your positions, and set clear parameters of how much you are willing to lose with the stop loss to prevent yourself from falling into the gambler’s fallacy, where you try to prevent additional losses than those you have already incurred by pumping more money in.

The verdict on Margin and Leverage Trading

Margin and leverage are great if you are trying to get into cryptocurrency trading with limited resources and if your starting capital is still relatively low.

If you know what tools are available to you to mitigate risk and prevent excessive losses, margin and leverage are excellent tools if you set clear boundaries with yourself and you are able to approach CFD trading with a relatively balanced view that you stand to gain if you play your cards right.

To get started on margin and leverage trading (SnapEx offers up to 100x leverage), go to our CFD trading platform here (hyperlink to the trading page)

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