- Margin trading is basically buying securities with money that was borrowed (bonds, derivatives, options, stocks).
- The best thing about buying on credit is that it gives you more money to spend and makes your wins bigger.
- Losses can also get bigger if you use margin. When you sell the securities in your margin account, the money from the sale goes first to pay back the loan to your broker.
What Is Margin Trading?
Margin trading is basically buying securities with money that was borrowed (bonds, derivatives, options, stocks). You need some money to make the purchase, but you can utilize a “margin” to make up the difference. FINRA sets the initial margin at 50% of the purchase’s value.
When you trade crypto on margin, you borrow money from an exchange and use it to buy more crypto or trade. When you buy on margin, you can increase your purchasing power and make your wins bigger. Because of this, trading on margin is also called trading with leverage. Margin traders are more likely to use futures and swaps or contracts that last forever.
What Is Margin In Trading?
In simple terms, the margin is the amount of money a trader must put down as a share of the total order value. It’s the loan your exchange platform gives you so that you can place bigger orders. So, if you have $1,000 in your trading account and 2x leverage, you can place orders worth up to $2,000.
The goal of margin is to increase profits from trades that go well. But the losses are bigger because the borrowed money must be paid back with interest even if the trade doesn’t work out. Because of this, you should only use leverage when you have a clear plan and are sure about your trade setup.
What Does Buying On Margin Mean?
We’ve already said that margin is the amount of cryptocurrency you need to use leverage. So, when you buy on margin, you actually borrow money to buy more of an asset than you could with the cash you already have.
For example, let’s say that Bitcoin is currently trading at $10,000, but you only have $5,000 in your account. You could buy up to $10,000 worth of Bitcoin with 2x leverage. Then, you would have to put down $5,000 as collateral, and the exchange would give you the other $5,000.
At CryptoBtcMag, we offer up to 100x leverage and a variety of order types, such as market orders, limit orders, conditional orders, and stop-loss orders, so that different trading strategies can be used.
Trading On Margin Example
If you wanted to buy $1,000 worth of stock, for example, you would need at least $500 of your own money. This is what margin trading means in its most simple form. In reality, there is a lot more to think about when deciding whether to buy on margin (borrow money) or not.
Let’s say you want to buy $100,000 worth of Bitcoin but you only have $2,000 in your account. Now, let’s say you only need a small amount of collateral for the loan, which, in the case of a 100:1 leverage ratio, can be as little as 1% of the size of the position. 1% of $100,000 is $1,000, so the required margin would be $1,000. You can make more trades with the $1,000 you still have in your account.
Now that we know how much collateral is needed to open a position, let’s see what happens when the price of Bitcoin goes up or down.
If the price of Bitcoin goes up 10% after you open your position, your account equity will also go up by 10%, but your used margin will stay the same.
If the price of Bitcoin goes down by 10%, so will the value of your account. But since the value of your collateral has gone down, you will need to add more money to keep your position size the same.
If the price of Bitcoin goes down by 20%, the exchange will automatically sell your position so that your account doesn’t go into the red.
Because of this, we at CryptoBtcMag suggest that you never put all of your trading accounts into the margin account. Instead, we suggest that you only use a small amount of your account to trade on margin. So, even if the price of Bitcoin drops by 50%, you will still have some money in your account to open new trades.
How Does Margin Trading Work?
On CryptoBtcMag, you can trade contracts that last forever and give you up to 100x leverage. To open a long or short position, all you have to do is set aside a certain amount of money or margin. Our smart system automatically adjusts the liquidation price based on how much leverage you have. If the price of Bitcoin moves against your position and reaches the liquidation price, your position will be closed automatically to keep your account from going into negative equity.
If you’re new to margin trading, we suggest you start with our crypto simulation platform, where you can learn and practice trading and test your strategies without putting any real money at risk.
How Much Margin Is Safe?
How much margin you should deposit on your trading account depends on how you trade. Less risk, lesser margin. You’ll make fewer errors. We recommend starting with a lower leverage ratio and increasing it as you learn.
But there are also benefits to having a higher margin ratio. For example, if you’re a more experienced trader and you’re sure you can predict how the market will move, you might want to use a higher leverage ratio so you can open bigger positions and make more money.
Terms & Concepts Associated With Margin Trading
- Margin Account: If you want to trade on margin, you need a separate margin account. You can’t just use a regular brokerage (cash) account. This is like keeping your debit card and credit card in separate accounts. This is where the securities you buy with a loan are kept.
- The initial Margin is the amount of money you must have on hand to buy something. FINRA says that this amount must be at least 50% of the total cost of the purchase. When you set up a margin account, you and the broker will agree on how much more money the broker needs.
- The maintenance Margin is also called maintenance requirement or minimum maintenance. This is the minimum amount of your own money that needs to be in your margin account after purchase. This is 25% of the total cost of the purchase, which is what FINRA says you have to do. Again, some brokers may want up to 30% to 40% more. Your maintenance margin will go up or down with the value of your purchase.
- When your own money in your margin account falls below the maintenance margin, you get a “margin call.” The call is a warning to put money into the account to bring it up to the maintenance margin. If you don’t, your broker might have to sell the securities in your margin account.
Overall, Is Margin Trading A Good Idea?
Margin trading can be a great way to make more money, but if the market goes against you, it can also make your losses bigger. At the end of the day, it depends on how much you know and how willing you are to take risks. If you are new to trading, you shouldn’t start with margin trading because the risks are higher. But if you know what you’re doing and have done some trading before, margin trading can be a good way to make more money.
Margin Trading With Pemex
When you trade cryptocurrencies on margin, you borrow money to buy more than your account balance allows. This is the same as trading on margin with other assets. With CryptoBtcMag, the main difference is that you borrow money from the exchange itself instead of from a broker. CryptoBtcMag lets you use up to 100x leverage, which means you can make bigger trades with less money. With our trading simulator, you can try out your strategies without risking any real money. With CryptoBtcMag, it is easier than ever to start trading on margin.