Leveraged Trading

Leveraged Trading

A lot of signal providers shout out with big winns like 100 or even 1000 % gains on a trade. Where do those % come from? I hear you thinking. Same question we had a few years back.

At Margin Traders NL we also use the possibility of leveraged trading. In this BLOG we explain what leveraged trading is all about. Before we started with leverage trading we practiced a lot with papertrading and testaccounts without real money. Winns can come quick but losses as well.

Leveraged trading is offered on various exchanges like Binance, Bitmex, Kraken and Bybit. These exchanges themselves provide lots of information about leverage trading in their FAQ’s, but in this BLOG we provide some collected information to give you an idea.

Leverage is the use of borrowed funds to increase one’s trading position beyond what would be available from their cash balance alone. Exchanges allow the use of leverage through margin trading, where the exchange provides the borrowed funds. Leverage can amplify both profits as well as losses.

In other words: leverage, otherwise known as risk level, is a temporary loan given to the trader by the exchange. It enables you to open a trade of a larger size with a smaller amount of invested capital.

Leverage is presented in the form of a multiplier (x3 – x5 – x10 up to cross leverage) that shows how much more than the invested amount a position is worth.

In the case of crypto, money is usually borrowed from an exchange. Crypto trading does offer high leverage, even cross, in the sense that for an initial margin requirement, a trader can build up—and control—a huge amount of money.

To calculate margin-based leverage, divide the total transaction value by the amount of margin you are required to put up:

Margin-Based Leverage = Total Value of Transaction / Margin Required

The best way to understand leverage is through an example of how it affects your potential profit or loss. If you trade with no leverage at all and invest $1,000, for every 1% move in the market you can gain or lose $10, which equals 1% of $1,000.

In comparison, if you were to invest the same $1,000 and trade using x10 leverage, the dollar value of your position would be equal to $10,000. 1% of $10,000 equals $100, so for every 1% move in the market you can gain or lose $100.

Bij het openen van een trade kun je beslissen of je gebruik wilt maken van de hefboomwerking of niet. Verschillende exchanges kunnen verschillende maximale hefboombedragen hebben. Ook de aangeboden hefboom kan per crypto valuta verschillen.

De op margin gebaseerde leverage heeft echter niet noodzakelijkerwijs invloed op het risico. Dit komt omdat de handelaar altijd meer dan de vereiste marge kan toekennen voor een positie. Dit geeft aan dat de reële hefboom, niet de op marge gebaseerde hefboom, de sterkere indicator van winst en verlies is.

The Bottom Line

Je hoeft niet bang te zijn voor een hefboomwerking als je eenmaal hebt geleerd hoe je het werkt.  Met goed beheer kan de hefboomwerking succesvol en winstgevend worden gebruikt. Met leverage moet je zorgvuldig omgegaan – als je dit beheerst, heb je geen reden om je zorgen te maken.

Smaller amounts of real leverage applied to each trade affords more breathing room by setting a wider but reasonable stop and avoiding a higher loss of capital. A highly leveraged trade can quickly deplete your trading account if it goes against you, as you will rack up greater losses due to the bigger lot sizes. Keep in mind that leverage is totally flexible and customizable to each trader’s needs.

There are several advantages to trading with leverage, so much that is has become a common tool in the world op crypto trading.

It minimizes the capital the trader must invest. Instead of paying the full price for a currency, the trader can pay only a small portion of it.

Sommige cryptocurrency’s zijn relatief goedkoop, wat betekent dat bijna elke trader ze gemakkelijk kan verhandelen. Sommige worden echter als meer prestigieus beschouwd, en op basis van hun verhandelde frequentie en andere factoren zijn ze duurder, zoals BitcoinCash (BCH). In plaats van grote bedragen te investeren om aan hun markt deel te nemen, kan iemand gebruik maken van de hefboomwerking en genieten van de schommelingen in de prijs van deze crypto munten.

While leverage trading, or margin trading, has less capital involved which can be a major advantage for many traders, it also comes with a loss risk. As someone can gain much more than his initial investment, losses can occur on the same scale. It is important to keep track of open positions and apply stoploss in order to prevent large losses.

When we decide to open a trading position, we first need to know what’s the applied margin, define a target, and define a maximum loss with a stop loss which will automatically decide our position in order to prevent losses by automatically closing the position.

Het is mogelijk om zeer eenvoudige regels voor risicomanagement te definiëren om te voorkomen dat men negatief wordt verrast door het hefboomeffect.

Choosing a suitable leverage depends on various factors like your capacity to manage risks, and your chosen trading style. If you trade on a short-timeframe basis, your perspectives of gains are not very high. With scalping, traders’ gain targets are tight so in order to obtain maximum gains, it is necessary to use a large leverage. On the contrary, if the scope of your investment is rather long-term, it is recommended to use a rather weak leverage in order to make sure that contrary movements on the market cannot eat up all of your invested money. To simplify and sum up what is important, to choose the best leverage, you have to study the volatility and define your investment period.

The increase in the size of your position thanks to the effect of leveraging will allow you to multiply your potential gains, but also your potential losses. In case you do not have any more funds available, you can’t open any further positions. In such a case you will be able to choose to either fund your account in order to increase your available funds, or to close a part of your positions in order to decrease the need of coverage. If your open positions progress in the wrong direction, you may find yourself in a situation your account will be liquidated in case of no stop losses or cross-leverage.

We hopen dat deze BLOG uw vragen heeft beantwoord. Aanvullende informatie kan worden gevraagd via support (leden).

IMPORTANT NOTE:

Try leveraged trading with Papertrading or testaccounts without real money and practice a lot.

The use of leverage carries a higher degree of risk because leverage augments both gains and losses. If you use leverage on a trade and the market moves against you, your loss will be greater than if leverage had not been applied.

Bronnen:
Bybit
Bitmex
Binance
Investopedia
Etoro

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