Investors that have limited resources may come across favorable trades that they cannot make because they have limited resources available. If Bitcoin is set to skyrocket because of a new development, a trader may want to cash in on the boom, but with limited resources, the trader cannot profit to their full potential.
Leveraged trading allows investors to borrow against their accounts, allowing for larger trades to be made.
Understanding Margin Trading
Margins are essentially loans, and these loans provide the investor with leverage to open a position. For example, a trader may opt to purchase Bitcoin with 2:1 leverage, so their $5,000 account can make a trade of $10,000.
Profits and losses can be massive, and there are commission and interest to be paid to the broker. Leverage can be substantial, too. This BitMex trading guide explains how BitMex offers up to 100:1 leverage in a trade, providing the opportunity for massive gains, but the potential for losses is just as big.
Margin trading enables an account to borrow at leverage, so if a trader has 10 BTC and the leverage is 10:1, they can open a short-term or long-term position with 100 bitcoins, amplifying their potential for profits tenfold.
Magnified losses are also a risk, with the trader having to pay interest and commission on the margin regardless of the status of the investment.
Minimizing Losses When Trading on Leverage
Investors have lost more money than they provided during an initial trade, and it’s because these investors didn’t take precautionary measures. There is never a “sure” position. Forecasts and economic changes can occur in minutes.
Limiting losses, especially on leverage, can help stop an investor from substantial losses. Small positions are the first step. Calculating potential losses, commission and interest before making a leveraged trade can help lessen a trade’s potential losses.
Stop-loss orders can help, too. These orders allow for the investor to call a stop to his position based on loss, and this can mitigate the trader’s losses before they become too much to handle.
Traders that do not have experience will want to experiment on demo accounts before making actual trades. These accounts will allow the trader to learn the platform and refine their trading tactics to find methods that are most profitable. Through a demo account, the trader can begin to learn about leveraged trading and margins.
Familiarization of potential losses through a demo account will allow for traders to better protect against losses on a live account. Initial trades should always be small, as the investor is still learning and adjusting his trading tactics.
Limiting leverage is one way to protect against leverage, too. High leverage is an attractive option because the potential for gains is much higher, yet the losses can be so great that the investor is put into the negative.
Expert traders recommend that before leveraging, it’s important for the trader to learn the ropes and only consider leveraged trades as the person gains more experience. Crypto coins are considered highly volatile, so margin trading of crypto coins enhances the trader’s risks even further.
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