Essentially a favorite of ambitious traders, leverage trading offers the grand opportunity to magnify your trading position yet without locking up a huge capital. This form of trading has been a ruling trading strategy in the conventional trading market and has also found a solid footing in the crypto scene as well. The best part about leverage trading is that it fuels up your profit possibility without asking for a large share of capital from your own part.
However, leverage trading is never without risk factors; in fact, leverage crypto trading holds the power to largely impact the success meter of your trading journey altogether. Visit multibank.io for more.
The post below offers a brief on how leveraging trading in the crypto scene could influence or affect your trading odds.
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How does leverage trading improve trading odds?
Let’s start with the good things first.
Well, leverage trading allows you to trade with a lent fund. All you would need to do here is to deposit and maintain a certain collateral amount into your crypto trading exchange to keep your trading position afloat. This collateral amount is termed as “margin” in the official diction of leverage trading, be it stocks or crypto.
As leverage trading allows you to borrow funds, it enables you to aim for bigger trading positions even when you are unable to deposit a large amount of capital from your own wallet. Bigger trading positions pave the way for bigger returns and higher profits if the market swings in your favor. There is a wide range of leverage to choose from as per your trading ambitions, ranging from 1x to 10x to 20x to even 100x. Higher is your leverage, greater is your profit potential.
So, the biggest benefit of leverage trading is that it permits you to aim for and even attain higher profits even if your personal trading balance doesn’t permit it. In other words, thanks to leverage trading, you will never have to “limit” your trading goals because of personal financial crunch. And, that’s a huge relief especially for ambitious traders.
For example, let’s say, you want to open a bigger position but you can only provide $100 for trading capital at the moment. Now, if you opt for leverage trading, you can borrow additional funds, say at 10x leverage. This way, your whole trading capital would magnify to $1,000. Now, if your chosen crypto moves up by 1%, you would be able to make a wholesome profit of $100. The 1% profit on leveraged position would scale up to 10% profit on the margin.
How does leverage trading affect trading odds?
1. Huge loss risk
Just the way leverage trading magnifies your profit potential, the same way it can abet your loss risks as well. The rate of loss could be even higher for the crypto scene given the comparatively higher volatility quotient of the crypto scene.
We can refer to the example given above where the leverage is 10x. Now, what if your preferred crypto plummets down by 10%? This 10% dip on leveraged trading position would culminate to 100% loss on margin sum. In that case, the margin will get liquidated and the crypto exchange will close down your trading position altogether.
Also Read: best leverage crypto exchange | Multibank
2. Higher leverage damages success potential
The risk factors of leverage trading is not limited to just loss risks. Worse, overtly higher leverage range might affect your overall success level at the trade. The problem of overtly higher leverage is associated with the glitch of amplified transaction cost.
If you opt for higher leverage and the margin is less than 10-20x of transaction costs, there is always a higher and faster risk of losing. It’s primarily because higher transaction costs will consume supporting margin, forcing the trader to end up with a closed out position. In some cases transaction costs are so high that these fees almost equate to supporting margin. In such situations, these abnormally high transaction fees would only leave the trader with nil supporting margin for the trading position, the moment the trader places the trade. Put simply, such situations would result in immediate closing of trading positions for the trader.
You cannot even aim for succeeding in leverage if you end up with a closed-out position immediately after placing trade.
How to solve the problems?
Good thing is, there are different ways to resolve these problems with leverage.
First, you need to be careful about the leverage range if you are looking forward to a successful experience with leverage trading. Yes, high-roller leverage ranges like 100x offer a golden window for stellar profit- but always remember, you would have to bear an equally high range of losses if the market doesn’t work in your favour. If you are just starting out in leverage trading , begin with the lowest level of leverage. After you get acquainted with the ropes of trading, you can opt for slightly higher range but never aim for excessively higher levels.
Then, you should be careful about the leverage trading transaction fees as charged by your chosen crypto exchange. There are several exchanges around- so invest some time in studying multiple exchanges before making the final call. Your chosen exchange for leverage trading should assure competitive rates. Exchanges that charge abnormally higher transaction charges are only interested in their profit figures. It’s true that the exchanges are driven by business intelligence but a fair business should also consider the safety and convenience of clients.
The other thing to be careful about is the leverage trading margin amount. One, make sure you will be able to refill the margin sum in case you ever get a margin call. Crypto exchanges will send you margin calls the moment they think your margin might get liquidated. In that case, you will have to refill that leverage trading margin amount immediately. So, do not deposit a higher margin amount that would be too high for you to refill. Another thing to remember is that you should not stick to the bare minimum level of margin as that can lead to faster liquidation in leverage trading. The margin level should be at least slightly higher to least permissible margin.