Leverage is simple enough to get to grips with, but beginner traders tend to steer clear until they feel more confident.
However, it doesn’t hurt to have a thorough understanding of how leverage opens up greater opportunities.
For example, leverage allows traders to borrow additional funds, which enables them to increase their position and hopefully gain a large profit.
Although, it has to be noted that leverage trading comes with a significantly higher risk. Below, we’ll tell you all about leverage trading so that you can decide if it’s the right path for you.
A Dive into Leverage
Leverage can be used to trade on MetaTrader 5 and other broker platforms, and it’s accessible across different markets.
The concept is easy enough to grasp; it simply means borrowing assets in an attempt to turn a higher profit. In most cases, leverage is displayed as a ratio, but it differs between platforms and pairs. For example, on ByBit, traders can leverage up to 100x the initial balance.
Understanding the ratio can be quite tricky at first, but it just shows you how many times your assets can be increased.
For example, if the ratio is 1:5, you can make 5x your funds. Other common ratios include 1:10 and 1:20, which are 10x and 20x respectively. In practice, this means if you’re purchasing $200 worth of Ethereum (ETH) with a 1:10 leverage, your purchase increases to $2000.
The amount of leverage you can receive will vary between exchanges, and each exchange will have a different leverage rating for the coins listed.
Therefore, before choosing the first leverage offer you see, it pays to shop around a little bit.
Leverage in Crypto Trading
Now that you understand how leverage works, we’ll explore how to start using leverage when trading with crypto. Before you do anything, you’ll have to set up an exchange account and deposit enough funds to cover the collateral.
If you know the total crypto you wish to buy with the leverage, there’s an easy calculation that will help you work out the required collateral.
For example, if you’re looking to buy $20,000 of ETH with a 1:10 leverage, your total deposit will need to be at least $2000 ETH.
Given how fast the crypto market moves, you’ll need to deposit additional funds to prevent liquidation during negative swings. These are called maintenance margins or margin thresholds.
Leverage can be used no matter which type of position you’re opening, whether it’s going long (predicting an increase in price) or going short (predicting the asset value will drop).
Pros of Crypto Trading Leverage
The most obvious benefit of leverage is opening a higher position, which means you can receive higher profits.
However, if the market doesn’t swing your way on a leveraged crypto trade, your potential losses can be devastating. As well as improving profits, leverage can help to add liquidity to your portfolio.
You will get more out of your leveraged crypto trade if you opt for a higher ratio, which means you won’t have to put the majority of your funds up as collateral.
Then, you can use the rest of your portfolio to explore other markets and assets, which will help protect you against negative market movements.
Managing Leverage Risks
When you’re exploring leverage for the first time, you may be drawn in by crypto positions with a 1:100 ratio (x100).
However, you have to factor in the risk of liquidation, which happens when the Unified Maintenance Margin falls below a given percentage. During this time, you won’t be able to make any further transactions.
When you’re exploring leverage, you always have to remember the high level of risk involved. The smallest market movements in the wrong way can be catastrophic.
Essentially, high volatility and high leverage positions don’t blend well, as there are zero margins for error.
There are several ways you can combat risk including take-profit and stop-loss orders. A stop-loss will allow your trading platform to close the position once the preset threshold for loss has been met.
On the other hand, take-profit will automatically close the position once a predetermined profit has been reached.
Before Trading with Leverage
Leverage sounds exciting because it has the potential to bring higher profits. However, if you’re a new trader, you should make sure you’re well prepared.
The best way to do this is with a demo account, which lets you try different strategies without using real assets.
Without the worry of loss, you can open and close leverage positions, which will show you how it works in real-time.
Leverage in crypto trading has the power to boost your portfolio total, but it also comes with the devastation of potentially draining your assets.
The majority of traders fail with leverage because they don’t learn how to properly manage the risks, so make sure you prioritize this before dipping your toes in.