Margin trading – what is it?

Traditional trading involves using the funds of a cryptocurrency trader to place trades. They deposit fiat currencies into their exchange account and execute trades with those funds. However, this is not the only way to make a purchase. Cryptocurrency exchanges also allow traders to borrow funds, enabling them to trade on margin. Let's explore the advantages and disadvantages of this approach.

Understanding Margin Trading

Funds are provided with the expectation of repayment, and the loan incurs interest or fees. This method allows traders to potentially earn more by borrowing a significant sum of money. Margin trading is often referred to as trading with leverage.

What Traders Need to Know

Before borrowing funds, traders must fully understand the following rules:

• The trader contributes a portion of the loan amount as collateral.
• Margin trading can be used for both long and short positions.
• Leverage ratio refers to the ratio of borrowed funds to the margin.
• If the market moves against an open position, a sudden drop may trigger a margin call. A margin call requires the trader to deposit additional funds to meet the minimum requirements. Failure to comply leads to the closure of the position and partial liquidation of the collateral.

Advantages and Disadvantages

Margin trading offers the following advantages for traders:

• Allows for increased potential profits, as trading can be conducted even in a declining market.
• Even traders with a small capital can open multiple margin trades.
• Traders do not need to deposit a significant amount of their own fiat funds.

However, there are significant drawbacks:

• Traders must have a certain level of experience. Margin trading carries higher risks compared to spot trading. The leverage multiplier can lead to losses that are significantly larger than the initial investment.
• Inexperienced traders often face margin calls that could have been avoided by using stop-loss orders. This is a common recommendation from experts.