A Complete Guide to Margin Trading for Beginners

[crwth]

Traders with limited resources tend to look for opportunities to earn more while trading cryptocurrencies. Margin trading allows precisely that - making more money with limited resources by adding leverage to the investment or position. This increases the amount invested without actually holding the assets. Before we go into details, it is essential to say that margin trading is carrying a very high risk, and it can lead to significant losses if not done correctly.

What is Margin Trading?
Put, margin trading is trading with the money borrowed from the broker. It can be seen as taking a loan from your broker.

Although trading on a margin doesn’t provide leverage in itself, it can be used to create leverage. This is because the amount you are allowed to trade on a margin directly depends on how much money you currently have in your account. Some exchanges allow up to x100 leverage, but typically it’s x2 to x6. For example, if your cash account holds 50,000 USD with x4 leverage, you would be able to use up to 200,000 USD for trading.

Requirements for a Margin Trading Account

Trading on margin is usually separated from crypto-cash trading on the exchanges. Some require a certain amount of cash to use the margin - for example, Bitfinex requires a deposit of 10,000 USD just to get registered. Thankfully, they changed that and let new people come into Bitfinex with even a small account balance.

Also, loaning money from your broker (exchange) is not free. The margin needs to be returned with interest, and different exchanges charge different interest rates. The interest rates for margin trading are usually lower than personal loan rates, making it more attractive to borrow through the broker than to take a personal loan.

Who Can Do Margin Trading?

Margin trading carries additional risks since you are trading the loaned money too. Additionally, managing the margin account to maintain a sufficient cash balance can tricky to master as market prices are always changing. For these reasons, margin trading is something to be considered primarily by experienced traders who are comfortable with managing risk and completely understand how margin trading works. If you aim to use margin, consider diversifying your portfolio to protect your assets against sudden changes in the market that can lead you to fall below your margin account minimum (below which the position gets liquidated).

Benefits of Margin Trading

1. Increase Buying Power and Profit Potential

Margin trading offers the ability to increase buying power and, subsequently, potential profits from trading. Margin trading allows you to buy more cryptocurrency than you would be able to buy with the cash on hand. The exact increase in purchasing power depends on your broker (from x2 to x100, or even higher). This increases your profits since each peak in coin’s value is multiplied by your margin value (from two to one hundred times).

2. Take Advantage of More Trade Opportunities

One of the great features offered by margin trading is taking advantage of multiple trading opportunities. Margin can, and often should, be used to buy various coins rather than invest in a single coin. For example, if you take 10,000 USD in the margin, you could buy 2,500 USD worth of four different coins to manage your risk better while at the same time increasing your opportunity to profit.

3. Short Selling

Another great benefit of margin accounts is the ability to short sell, which gives profits when a coin’s price falls. This means it is possible to make money even in the declining market, which is something experienced traders often take advantage of.

Risks of Margin Trading

1. Margin Calls

The dreaded margin call, which informs you that your account’s balance is below the minimum amount required to maintain your trade is a significant risk of trading on margin. When you receive a margin call, you have a limited window of time to either deposit more funds or sell some of your coins bought on margin. This means if you don’t have extra cash to add to your margin balance, you could be forced to sell at a loss instead of waiting out a low price period.

2. Interest Charges

Another downside of margin trading is the interest on your loan. Although margin interest rates are mostly lower than personal loan interest rates, the amounts can quickly add up if you perform various margin trades.

3. Additional Trading Risk

Trading with double (or higher) buying power also means that your potential loss is also doubled if a trade goes wrong. This is why the diversification of the portfolio is important. Many inexperienced traders are not prepared both financially and psychologically to handle a portfolio that comes with increased buying power. Margin trading also brings many psychological risks as the beginners, usually encouraged by initial success, bite off more than they can chew. This potentially can lead to huge losses, which inflict a lot of stress to the trader. It is essential to consider these risks before starting trade on a margin. 

Conclusion

Margin trading is a great way to boost purchasing power, especially if you are an experienced trader. However, it comes with significant risks, particularly if misused. Make sure to understand the margin trading well and diversify portfolio before jumping into margin trading.

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[butka]

This is a great guide for someone who has never tried margin trading. You have emphasized the risks, which are huge comparing to normal trading, with the dreaded margin call being on the top of them. The main benefit is primarily the increased buying potential, as you pointed out.

I would just add one point: you are already taking huge risks by even engaging in margin trading. Minimize the risk by always trading a portion of your entire portfolio. I know some people are striving to get huge gains and get them fast. As a result, they trade their entire account with huge leverages. Better to be safe than sorry. Therefore, decide to trade a portion of your account with smaller leverages, so if you get liquidated, at least the majority of your funds are still there, and your get to have many additional tries/trades.

[crwth]

This is a great guide for someone who has never tried margin trading. You have emphasized the risks, which are huge comparing to normal trading, with the dreaded margin call being on the top of them. The main benefit is primarily the increased buying potential, as you pointed out.

Thank you for liking it, I think everyone should know that even if it's a simple guide like this.

I would just add one point: you are already taking huge risks by even engaging in margin trading. Minimize the risk by always trading a portion of your entire portfolio.

I like your suggestion. It is indeed one of the needs when you think of trading, as I have included in some of my guides on my website, I did include a part of that. Especially considering the part where you should risk what you can afford to lose.

I know some people are striving to get huge gains and get them fast. As a result, they trade their entire account with huge leverages. Better to be safe than sorry.

I have been there and I regret becoming like that. I lost a lot of money just by trading leverage and I thought that I'm good, that I'm confident enough to see my balance grow but lost a lot. I think I'm continuing to grow into a better position.

[butka]

I have been there and I regret becoming like that. I lost a lot of money just by trading leverage and I thought that I'm good, that I'm confident enough to see my balance grow but lost a lot. I think I'm continuing to grow into a better position.

Me too. I still sometimes have a problem restraining myself not to risk too much but to go slow and try to have consistent profit, instead of taking huge risks. I have to remind myself that I'm playing the long game. And the long game means winning by not losing.

[crwth]

I have been there and I regret becoming like that. I lost a lot of money just by trading leverage and I thought that I'm good, that I'm confident enough to see my balance grow but lost a lot. I think I'm continuing to grow into a better position.

Me too. I still sometimes have a problem restraining myself not to risk too much but to go slow and try to have consistent profit, instead of taking huge risks. I have to remind myself that I'm playing the long game. And the long game means winning by not losing.

I think it's in someone's nature to have that greedy side, to want many things, but it's definitely not advisable especially if you are targeting the long game. I think you are correct in that one. I hope that everyone would acknowledge where they are right now and how they are going to improve by learning new stuff.

No risk means no gains, everything has risks.

[sheenshane]

It takes 10 minutes for me to read this very informative thread, I just wanted to know how margin trading it works and the possible risk on it. All I know is in basic trading the buy low and sell high method but about this, it is very interesting to learn.

But I saw that it requires a huge amount before you can start an account in margin trading so how much the minimum of making an account?

[crwth]

But I saw that it requires a huge amount before you can start an account in margin trading so how much the minimum of making an account?

Right now, I’m using BitMex as my exchange with margin trading. The $10000 on Bitfinex is history IIRC. I recently registered there but didn’t get to deposit any coins to trade. Not yet anyways.

[Whaleagent]

But I saw that it requires a huge amount before you can start an account in margin trading so how much the minimum of making an account?

Right now, I’m using BitMex as my exchange with margin trading. The $10000 on Bitfinex is history IIRC. I recently registered there but didn’t get to deposit any coins to trade. Not yet anyways.

You might want to add that shorting on Bitmex actually carries out less risk compared to going long, the risk is a bit lower but can be significant. Here is a table showing this:


It shows that even with the 1x leverage, the risk of liquidation when going long is quite possible, however the risk of liquidation when going short is almost impossible. The difference is smaller the higher the leverage is, however since you don't really want to leverage more than x20 or so, it doesn't matter.

[--DarkSecrets--]

This is such a very biog help for all of us here good Guidelines. Hope you add some more especially making some good analysis towards the market. Still i am a beginner on bitmex and my emotions get back while doing trades there unlike in the altcoins as long as i am holding my tokens , no expirations and i will only loss amounts if i sold it unlike bitmex that has a liquidation. I am broke on that trading exchange but, i am learning more tactics form other pro bitmex traders watching it and applying on my own.

[Beerwizzard]

Emm...
Dude, that is only some points that superficially describe what is margin trading. That thing can't be called "a complete guide to margin trading". It looks more like an intro for complete guide.
If someone is searshing for a place with good amount of information then you can go to this website: https://www.babypips.com/learn/forex
It is about forex but all those things also applicable to crypto.

[Bdstar]

Though I am related to trading for few years but never heard of Margin trading. Thanks for this informative thread about margin trading.I cached the last line which is reflecting If anyone is experienced in trading only he/she should start Margin trading.I think margin trading is more riskier than actual/normal trading because here you have to payback with interest which is a real challenge.Those who are good at trading but cant make good profits because of less capital can try Margin Trading IMO.

[target]

I use to do margin trading on bitfinex with DASH, I didn't really experience much borrower there lowering my rate would be a disadvantage on my side too.

Emm...
Dude, that is only some points that superficially describe what is margin trading. That thing can't be called "a complete guide to margin trading". It looks more like an intro for complete guide.
If someone is searshing for a place with good amount of information then you can go to this website: https://www.babypips.com/learn/forex
It is about forex but all those things also applicable to crypto.

The only applicable indicators one could use is the RSI and Fibonacci for which you can see where the support and resistance in advance. Been in babypips for years too. There are trading systems shared in the forum unlike here. It only shows the cryptospace is in the very early stage.

[CryptopreneurBrainboss]

Though I am related to trading for few years but never heard of Margin trading.

You're related like are you trading's relation? Lol and you saying you haven't heard about margin trading is something very common among most crypto traders since margin trading isn't that common in the cryptocurrency industry and only few exchanges offer such option. I personally haven't tried margin trading in cryptocurrency but i have done so numerous times back in my days of forex trading. I won't recommend margin trading to any newbie reading this thread as it's more risky than actual trading resulting to the possibility of you lossing all your fund. Stick to the regular trading don't be too greedy unless you're an expert.

[Whaleagent]

I use to do margin trading on bitfinex with DASH, I didn't really experience much borrower there lowering my rate would be a disadvantage on my side too.

Emm...
Dude, that is only some points that superficially describe what is margin trading. That thing can't be called "a complete guide to margin trading". It looks more like an intro for complete guide.
If someone is searshing for a place with good amount of information then you can go to this website: https://www.babypips.com/learn/forex
It is about forex but all those things also applicable to crypto.

The only applicable indicators one could use is the RSI and Fibonacci for which you can see where the support and resistance in advance. Been in babypips for years too. There are trading systems shared in the forum unlike here. It only shows the cryptospace is in the very early stage.

You have to know how to use the RSI in order for it to be beneficial. If you check the daily chart for bitcoin for the past 6 months, the RSI was extremely overextended when the crash at 6000$ happened and stayed that way for weeks, similarly now, after the big bull move, the RSI was overextended for weeks. There is a good way to take advantage of the RSI, bounces. During this small bull run, every time the RSI crossed into the over-sold area in the 5 minute chart, bulls bought the dip instantly, a ton of trading opportunity there.

[bhabygrim]

Nice guide it is really helpful and useful for us who doesn't know too much in trading,
I think I would spend sometime to study this margin trading and try it out on some trading simulator.
This is why this forum is one of the best source of knowledge when it comes to crypto currency.

[CryptoBry]

This is a great guide for someone who has never tried margin trading. You have emphasized the risks, which are huge comparing to normal trading, with the dreaded margin call being on the top of them. The main benefit is primarily the increased buying potential, as you pointed out.
I would just add one point: you are already taking huge risks by even engaging in margin trading. Minimize the risk by always trading a portion of your entire portfolio. I know some people are striving to get huge gains and get them fast. As a result, they trade their entire account with huge leverages. Better to be safe than sorry. Therefore, decide to trade a portion of your account with smaller leverages, so if you get liquidated, at least the majority of your funds are still there, and you get to have many additional tries/trades.

Margin trading can works wonder for traders who are discipline and know the risks involved so that he can easily manage them. This is definitely not the right way for people who have gambling as the mindset as it can lead to a big disaster. The most important benefit with margin trading is the leverage offered to the user but of course it also entails risks so one should know the right strategies to contain risks while maximizing potential for profits. As what you said, better safe than sorry.

[davis196]

Very informative guide.However,I wouldn't recommend margin trading to traders and have a limited capital.Traders with limited capital usually have limited experience and knowledge as well,which might lead to mistakes and huge loss.A trader has to practice standard crypto trading for 2 years minimum,before he jumps into the margin trading wagon.

[Kelvinid]

Very informative guide.However,I wouldn't recommend margin trading to traders and have a limited capital.Traders with limited capital usually have limited experience and knowledge as well,which might lead to mistakes and huge loss.A trader has to practice standard crypto trading for 2 years minimum,before he jumps into the margin trading wagon.

I know trading will not for everyone especially when you are using Margin trading. Our possible profit will vary on how much capital we use to start trading.
Oftenly, we only know basic in trading but somehow isn't effective at all. If I have enough capital to start with, I may consider using Margin trading rather than to stick for the old one. This is also important to elevate our learning and also strategies this time become more profitable.

[leowonderful]

Also good to note that the amount of longs and shorts on a site like Bitmex at any time is in a 1:1 ratio, and when you're margin longing you're swapping positions with someone that's shorting and vice versa. The great thing about Bitmex is liquidation which means longs have unlimited profits and limited downside unlike trading contracts for Bitcoin futures in a place like CME, where you can lose more than your initial margin. This means Bitmex contracts are safer to trade than contracts elsewhere, but leverage can still wipe out your account if you don't use it correctly.

As for a few tips on Bitmex, because of the fees involved in liquidation you can actually save a lot of money if you're not using a tight stop on a position by setting a stop market a few points above your liquidation price in the case of a long. You should also be using limit orders whenever possible on Bitmex, because market orders have a 0.075% fee tied to them that is applied to your entire leveraged position, and you actually get a fee rebate of 0.025% for using limit orders. This doesn't sound like a lot, but fees add up very quickly and you want to make sure fees are at a minimum whenever you're trading.

[pey]

Thank you for this useful and helpful piece of guide on margin trading. It will definitely help beginners, margin trading is not something very risky. If you know how to take advantage of it in crypto, it is basically very useful tool.