Guide to Crypto Margin Trading: Step-by-Step Guide

TLDR

Crypto margin trading has become more popular in the crypto space because investors prefer to invest in Cryptos and digital assets because of their popularity these days. Margin trading is a trading form that allows you to trade cryptocurrencies with more funds than you own, which is possible by borrowing money from a broker in crypto exchanges. The followings are the steps that should be taken to do margin trading in margin trading exchanges :

Open a margin trading account in crypto exchanges

Deposit fund

Choose trading pair for margin trading exchanges.

Choose leverage for the position

Place the order

Margin trading

Margin Trading

Margin is the total amount the trader has to put up for the trade.  The amount of money you can borrow depends entirely on the margin you add. Margin trading allows you to use leverage to improve your purchasing power which will result in making larger investments that you cannot afford.

You need to remember that margin trading can also be dangerous since it will increase the chances of losing higher amounts of your own money.  Margin trading is considered secured lending, and to limit risk, some ways can be helpful and are discussed further.

Margin Trading in Crypto

As mentioned earlier, in crypto or crypto margin trading, you can borrow money from a broker or a third party in the exchange platform to buy or trade a specific type of cryptocurrency. This type of trading requires a higher risk since cryptocurrencies in margin trading are changeable and unstable.

The word Margin refers to the money that one borrows from a third party, and in some cases, the third party is called the margin lender. If you are not experienced enough in crypto margin trading, you have higher risks to take. However, it will bring you chance and opportunity.

How to Margin Trade on Binance: Step-by-Step

Here are the steps you need to follow to do Binance margin trading (crypto margin trading). The steps are quite simple, and this guide will help you understand and learn how to do effective crypto margin trading.

Step 1: Open a Margin Account

To begin with Bitcoin margin trading, a trader needs to go to the margin trading page on Binance, which means that he or she needs to have a Bitcoin margin trading account. the process of how one can create such an account is going to be explained later on.

Step 2: Deposit Funds

As a trader, you need to make an initial deposit to open the position, which is known as the Initial Margin. you need to pay an amount of capital or money to open positions.

Step 3: Choose Trading Pair for Margin Trading

The next step in Bitcoin margin trading is choosing the cryptocurrencies you wish to exchange or trade. It can be different cryptos such as ETH, BCH, BTC, etc.

Step 4: Choose Leverage for the Position

Then you need to hold an amount of capital to maintain and keep the position. The amount of money you can leverage to margin trade depends on the rules and conditions of your trading platform.

Step 5: Place the Orders

When all the above is done in the trading platform, which is Binance in this case, and the leverage is set, you can place the order on the platform and wait for the process to be done.

How to Open a Margin Trading Account?

As with any other account, the crypto margin account requires some authentication which can be done through email or phone number. When the account is created successfully, the broker will ask you to sign and agree to a margin agreement.

This agreement expresses that you should follow and abide by the rules and conditions imposed by the platform, which include explaining the interest on the loan and the way it is calculated, the responsibilities you have for repaying the loan, and how the assets and cryptos you buy serve as collateral for the loan. You can proceed with the trading process when you agree to all the terms and conditions.

Important Concepts You Must Understand Before Placing a Trade

Leveraged Trading

Leveraged trading refers to the number of assets you borrow from the crypto margin trading exchanges or a third party. The amount of leverage needed to do leverage trading varies, and you can choose leverage that is low as 2x, or you can go as high as 125x or even more. the margin amount, the policy that crypto margin trading exchanges follow, and the cryptocurrency you are trading are the factors that can control the maximum leverage you can borrow.

Position Size

Position sizing is defined as the number of units or cryptos (size of a position) that are invested in a particular security by an investor or margin trader in different trading platforms. As an investor, you can use position sizing to help determine how many units of security you can buy, and that will be a good step toward controlling the possible risks. When determining appropriate position sizing, the investor’s account size and risk tolerance should be considered.

Cross Margin vs Isolated Margin

While adding margin into the account in trading platforms, to open the position, you will encounter two types of margin that are Isolated margin trading and Cross margin trading. Each one of them has different capacities.

For instance, Isolated margin trading allows you to deduce a certain amount of funds to a single position, which means that the result of a trade done by an isolated margin will only affect the funds attached to that position and not the other funds in the account.

Compared to the Isolated margin, the cross margin trading allows you to use the same funds for multiple positions in your margin account. For instance, if you want to long both Bitcoin and Ethereum, and you only have $200, you can open the position in the Cross margin and dedicate the funds to both positions to gain profit from both of them.

However, if you are inexperienced in margin trading crypto, you must stick to an Isolated margin since it is much safer and a great learning option.

Liquidation Price

A liquidation price is calculated and set by the broker of the third party every time anyone opens a trade for margin trading cryptocurrency, regarding the margin and leverage. In a long position, if the price of the asset drops to the liquidation price, unfortunately, you will lose all your funds because your position is now liquidated, and in a short position, if the price of the assets rises as high as the liquidation price, the margin used for that position would be liquidated.

Margin Call

margin call refers to times you are asked to add more margin to your position to keep it open. If you fail to meet the requirement, the position will be closed if you do not see the requirements.

Order Types

Stop-Limit Order

What is a Stop-limit order? Filling a stop-limit order will assure you that you are entering the trade at the right time. It allows you to create a new position when the price of the assets goes higher or lower than a specific value. A stop limit order will allow you to set a period for the time that you want the position to be open. It also allows you to set a period for the trade to be open.

Stop-Loss Order

These two types of orders are somehow the same in margin trading, but in opposition to the stop limit order, the cross limit will shut the position as soon as the asset’s value hits a specific price. This type of order is used to promise that you will not lose the higher profit you can afford. To make this type of order work, you have to set a certain price so the asset will not go lower than that.

Long Positions vs Short Positions

there are two options in front of you when you want to open a position in margin trading. one is a long position, and the other is a short one. the difference between these two is going to be explained.

Long Positions

The long-term position refers to when traders while making a margin trading, predict that the price of a certain cryptocurrency will rise in the future. Therefore, he can open a long position for that specific cryptocurrency. To make it more touchable, if you have opened a long position for Ethereum with a 20x leverage and you are sure the price will rise, you will make 100% profits on your investment. Closing the position is up to you; you can close it as soon as the trade is done.

Short Positions

As the name indicates, the short position differs from what long positions are open for. If there is a possibility of the price of cryptocurrencies falling, the short position will be used to prevent further loss. To make it more tangible, imagine that the price of a certain cryptocurrency (Ethereum) will fall in the future. If you open a short position, you will gain profit since the crypto price is now falling to 5%, for instance.

Long Squeeze and Short Squeeze

The long squeeze is referred to the times when the price of an asset or cryptocurrency in margin trading suddenly drops unexpectedly. This type of drop can last for a long time or happen for an instant. However, it is devastating to hear that the price and worth of the asset you have been counting on are now dropped to its half.

When this price drop happens, buyers and investors in margin trading are often ‘squeezed’ out, which means that they close their positions instantly to prevent any further loss, and when the balance between buyers and sellers changes, it adds to the downward momentum. When a long squeeze occurs, traders who hold leveraged positions are more vulnerable.

A short squeeze in margin trading occurs when a security has a huge number of short sellers, which means that most investors are betting on its price falling. A short squeeze is known as an unusual condition. It, in fact, activates rapidly rising prices in a stock or other tradable security. When the price of an asset rises in margin trading without being predicted, and at that point, sellers exit their positions, the short squeeze begins.

Technical Analysis for Margin Trading

although margin trades seem to be the perfect and ideal type of crypto trading, it is not problem-free. In this part of the article, we will explain the advantages and disadvantages of Margin trading in the crypto exchange.

Advantages of margin trade crypto include the ability to make various positions (traders can open several positions – long and short positions- with a small amount of investment capital) in the trading platform, giving access to more funds to traders who start margin trading, and allowing users to learn new and functional trading strategies and trading methods.

Disadvantages include Risks that it might bring with itself in crypto trading, losses that are hard to make up for (margin trading could result in losses in crypto trading that exceed the trader’s initial investment), and the extremely volatile cryptocurrencies.

The Importance of Risk Management

As it was mentioned, margin trading has high risks for people who are inexperienced in this field. Knowing how to manage risk will help the investors decrease the loss to its least and protect traders’ accounts from losing all their money. Knowing proper risk management is essential, but sometimes you have to take risks even though it is unpleasant. There are some tips b which you can lower the chances of losing.

Risk-to-Reward Ratio

Many investors use risk/reward ratios that compare the reward we might take from an offer or order and the amount of money we should risk. This technique clarifies the reward investors can earn for every dollar they risk on an investment.

For instance, suppose that you have to do margin trading in a crypto exchange with a risk-reward ratio of 1:5 which means that you are willing to pay 1 dollar to earn 5 dollars. But in another case, if the risk-reward ratio is lower, it will be interpreted as an investment and not a risk.

Stop Loss

We have explained the definition of stop loss order earlier. The advantages it brings to the investment are that it will charge you nothing and is mostly referred to as a free insurance policy. Additionally, when you are on a vacation or in other words, not available, setting a stop loss order is the best option since it does not require your full-time watch, and it functions automatically.

Targets in margin trading

The second one is to remember the destination you are planning for when you do margin trading. You need to set an exit goal and stop-loss levels, which allows the price of your asset to reach a certain level before losing a big amount of profit.

Margin Trading vs Spot Trading

In the spot market or spot trading, the rule is to bet as much as you can afford, no more or less. That is the point with spot trading. You will have to pay only the trading fee, which is a small amount and varies on different exchange platforms, and is dependent on the amount of money that you are investing.

This type of trading happens when you bet more than you have available. Most cryptocurrency exchanges allow you to trade on a margin of up to 20 times leverage, or 1:20, which means you are putting up 5% of the cost of the cryptocurrency you’re buying. For instance, if you want to buy one Bitcoin at $50,000 on a margin of 20x, you give $2,500 in collateral and borrow the remaining $47,500 from the broker.

If Bitcoin goes up by any percentage, the money that you have given will also be doubled or tripled. And the same thing happens when the price of an asset drops. Your money will go down as well.  In any case, sometimes the third part in an exchange might not let you lose the borrowed money since you might be unable to pay it back.

Summary

Margin trading is a good way to make a profit, and to do it; you need to borrow money from a third party to buy the cryptocurrency you desire. There are pros and cons to this type of trading that need to be considered before any further action.

For instance, as an advantage, margin trading will allow you to make various positions, such as short and long positions, and as a disadvantage, we can refer to the fact that it needs high risks to be taken. However, despite being popular and well-known, margin trading is not designed for all kinds of traders.

It is not recommended if you are new in the crypto space because you can double or triple your investments in just a few days, but you can also lose all your funds when you margin trade. Inexperienced traders are suggested to go for low leverage and margin and must always choose trusted cryptocurrency exchanges like ByBit and Binance.