Margin trading tips and strategies every trader should know

Antreas Themistokleous

Trading Specialist at Exness

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This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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In this guide:

  1. What is margin trading?
  2. Benefits of margin trading cryptocurrencies
  3. Risks and challenges of margin trading
  4. Tips for managing risks of margin trading
  5. Ready to try crypto margin trading?

Are you interested in learning how margin trading works and how it can help you amplify your market exposure? This guide dives deep into the world of trading on margin, starting with explaining what it is, how it applies to cryptocurrencies, and the potential benefits it can offer you. It also highlights the risks and challenges involved in trading on margin and shares tips on averting or managing the risks of margin trading.

What is margin trading?

Margin trading is a powerful financial tool that enables you to trade with borrowed money from a brokerage firm.

By utilizing a margin account (a brokerage account that uses leverage), you can potentially generate higher returns, but there is also an increased risk of experiencing significant losses. You can also seize market opportunities that may not be available with traditional cash-only trading. However, trading with borrowed money also carries significant risks. That’s why it is crucial that you understand the mechanics, benefits, and potential pitfalls associated with this approach before you start.

Definition and mechanics of trading on margin

Trading on margin means borrowing money otherwise known as using leverage. Leverage is often provided by a brokerage firm, to buy or sell financial assets such as stocks, options, futures, or cryptocurrencies. These borrowed funds act as leverage, enabling you to trade cryptocurrencies with more money than you deposited, and control a larger position than your available capital would otherwise allow.

When you open a margin account, you deposit a certain amount of cash or securities that act as collateral for the borrowed capital. The amount of funds you can borrow is determined by your broker’s maintenance margin requirements. These requirements specify the minimum percentage of a trade's total value that you must contribute in cash or securities. The initial margin requirement is the percentage of your investment value needed to start a trade, and the maintenance margin requirement is the minimum amount of equity you must have to avoid a margin call.

The mechanics of margin trading involve borrowing funds at a specified interest rate from the brokerage and using those funds to enter trades. As the value of the securities fluctuates, the equity in the margin account also changes. If the equity falls below the maintenance margin requirement, a margin call may be issued, where you will be required to deposit additional funds or securities to restore the required margin. Failure to meet the margin call can result in forced liquidation (stop out) of the trader's positions by the brokerage.

In such cases, Exness’ unique Stop Out Protection feature can help you avoid dropping out completely, while giving your position the chance to potentially turn around to a more favorable direction.

Benefits of margin trading cryptocurrencies

Increased market exposure

One of the primary benefits of crypto margin trading is the ability to increase market exposure and potentially generate higher returns due to the high volatility of cryptocurrencies. By using a margin loan to control larger positions, you can participate in larger movements in the crypto markets and potentially amplify your profits during favorable market conditions. With a smaller initial investment, trading on margin allows you to access a wider range of opportunities.

Trading on margin enables you to capitalize on market trends and short-term price fluctuations. By leveraging your capital, you can enter and exit positions swiftly, taking advantage of market movements that might have otherwise been inaccessible due to limited funds. This increased market exposure can lead to enhanced trading opportunities and the potential for higher profits.

Leverage, otherwise known as margin loans, gives you buying power since it increases your initial deposit by a specific multiple. For example, if you deposit $100 with a margin loan of 1:100 then you can open trades worth $10,000.

Short-selling opportunities

Margin trading also facilitates short-selling, which can be advantageous in bearish market conditions. Short-selling involves borrowing and selling crypto coins that you do not own, with the intention of buying them back at a lower price in the future. By capitalizing on downward price movements, you can profit from falling prices and potentially generate returns in both bullish and bearish markets.

Short-selling can help you profit from market downturns, making trading on margin a versatile strategy that can be employed in various market conditions. In addition, short-selling can serve as a risk management tool by providing a means to hedge against potential losses if you are holding on to long positions.

Diversification and risk management

Trading on margin can also provide you with the opportunity to diversify your portfolio and implement sophisticated risk management strategies. By leveraging additional capital, you can spread your investments across different assets, sectors, or markets. This diversification can potentially reduce the impact of individual positions on your overall portfolio, providing a level of risk mitigation.

With margin trading you can also use risk management tools such as stop-loss orders. These orders automatically sell a position if it reaches a predetermined price, limiting potential losses. By setting stop-loss orders, you can define your risk tolerance and protect your capital in the event of unfavorable price movements.

Risks and challenges of margin trading

Increased volatility and losses

While trading on margin amplifies potential profits, it also magnifies losses. If a trade moves against your desired direction, losses can exceed the initial investment due to the borrowed money and interest charges. Market volatility can lead to rapid and significant price fluctuations, heightening the risk of substantial losses which can push your balance to negative balance and then have to deposit funds just to cover this amount. With an Exness trading account however you don’t need to worry about negative balance because the feature of negative balance protection shields you against such cases. You need to carefully assess the risks associated with each trade and consider the potential downside before entering into margin positions.

Market volatility is a crucial factor to consider in trading on margin. As prices fluctuate, the borrowed capital can amplify both gains and losses. You must be prepared for the possibility of sudden price movements and have strategies in place to manage potential losses effectively. You can mitigate volatility-related risks by conducting thorough market analysis and utilizing risk management tools.

Margin call and forced liquidation

When trading on margin, it is essential to maintain an adequate level of equity in the margin account. If the value of the securities in a margin account declines below a certain level, known as the maintenance margin requirement, a margin call is triggered.

A margin call requires you to either deposit additional funds or securities to meet the margin requirement or face getting your positions liquidated by your brokerage. Liquidation that is forced may lead to substantial losses, and you may not have control over when and at what price your positions are closed.

Margin calls can occur when the value of the securities in your margin account drops to a certain level, leading to a decrease in the equity level. To avoid this, you must closely monitor your margin levels and have a plan in place to meet requirements in case of a margin call. Adequate risk management, including setting stop-loss orders and maintaining sufficient funds, can help prevent or manage margin calls.

Interest costs and fees

Trading with a margin loan involves borrowing funds, which accrue interest charges; this means you may need to pay interest. You need to consider the interest rate and expenses, otherwise when calculating potential returns. Moreover, brokerages often charge fees for margin accounts, such as interest on borrowed funds, account maintenance, and margin call fees. These costs can eat into potential profits and should be taken into account when evaluating the viability of margin trading strategies.

The interest rate on borrowed funds can vary depending on market conditions and the brokerage's policies. You need to carefully assess the interest costs associated with margin trading and factor them into their trading strategies. Comparing different brokerage firms and their fee structures can help you choose the most cost-effective option for trading on margin.

Tips for managing risks of margin trading

Educate yourself

1. Before engaging in margin trading, it is important that you understand how margin requirements, interest rates, and margin calls work to make informed decisions.

2. Familiarize yourself with the rules and regulations of the brokerage and relevant financial authorities.

3. Take the time to learn about technical and fundamental analysis, risk management strategies, and market indicators that can aid you in making informed trading decisions.

Set realistic goals

Step 1: Define clear goals and risk tolerance levels. Avoid excessive leverage that could lead to severe losses.

Step 2: Develop a trading plan that aligns with your financial objectives and risk appetite. Set realistic expectations for returns and be prepared to adjust your strategy based on changing market conditions.

Step 3: Have a clear understanding of your financial objectives, the level of risk you are comfortable with, and the potential losses you can afford.

Tips: You can learn how to set/change your leverage on your Exness trading account through your Personal Area once you’ve registered for an Exness trading account.

Conduct thorough analysis

1. Use technical and fundamental analysis techniques to assess potential risks and rewards.

2. Implement stop-loss orders to limit losses and protect your capital.

3. Consider the potential impact of economic events, news releases, and market trends on your margin positions.

You need to utilize technical analysis tools, such as charts, indicators, and patterns, to identify potential entry and exit points. Fundamental analysis can help assess the underlying value of financial instruments and identify market trends. Combining these approaches can provide a comprehensive understanding of the market and aid in making informed trading decisions.

Regularly monitor positions

1. Actively monitor your portfolio and be prepared to make timely adjustments to manage risk effectively.

2. Stay informed about market news, economic indicators, and any developments that could impact your margin trades.

Margin trading requires active monitoring of positions to assess market conditions and make necessary adjustments. You must regularly review your portfolio, monitor market trends, and stay updated with relevant news and events. Being proactive in managing margin positions can help you minimize risks and capitalize on potential opportunities.

Maintain adequate margin

Maintaining a comfortable margin level above the minimum requirements is crucial to mitigate the risk of margin calls.

Consider:

1. Keeping additional funds or securities available in case of unforeseen market volatility.

2. Regularly reviewing your margin account balance and ensure it remains within a safe margin threshold.

3. Maintaining adequate margin, vital to avoiding margin calls and forced liquidation.

4. Calculating the required margin level for your positions and ensure you have a sufficient buffer to account for potential price fluctuations.

Tip: Check out the margin call and stop out levels set for Exness’ various trading accounts to get a better understanding of how margin calls and stop out levels work at Exness.

Utilize risk management tools

Implement risk management tools to help protect your capital and limit losses:

1. Stop loss orders automatically trigger a sale of a position if it reaches a predetermined price level.

2. Trailing stop orders can be used to adjust the stop loss price as the market moves in your favor, protecting profits while allowing for potential upside.

Frequently asked questions

Margin trading involves borrowing money from a broker to buy assets like cryptocurrencies for example, allowing investors to purchase more than their current funds permit. The broker provides funds for the investor to buy the coins, with the investor paying a portion of the total amount as margin and the broker lending the rest. Margin trading is beneficial for short-term profit generation and leveraging market position, but it also comes with risks such as massive losses, the need to maintain a minimum balance and the possibility of liquidation of your brokerage account.

Margin trading is not the ideal way to start trading, therefore it’s not a very wise option for beginner investors or traders. It has a lot of parameters that need to be taken into account and a beginner trader might find themselves in deep water early in the trading experience. Due to the complexity of the way this level of trading works, it can easily liquify a beginner’s brokerage account in a very short period of time. This is because beginners tend to only take into consideration the massive potential for profits that leverage offers, without really thinking about the exponential losses that are very likely to occur if they don’t manage their funds wisely.

A margin call is like a warning from a broker when you're trading crypto or any other instruments. It happens if the value of your investments drops too much, and the broker wants you to add more money to your account to cover potential losses. If you don't add more money, they might sell some of your investments to make up for the loss. It's a way to make sure you can still pay your debts and not lose too much money.

A regular trading account is like using only your own cash to open trades in crypto. You can buy and sell with the money you already deposited.

Now, a margin account is like the broker giving you a loan. You can use some of the broker’s money, sometimes called a margin loan, to trade more in crypto than you would be able to with just your own money. But here's the catch: if your crypto trades lose value, you might have to pay back these margin loans. It's riskier but can give you more opportunities to make more money if the market moves in your favor, or bigger losses if things go wrong.

Advantages:

1. Increased buying power

2. Potential for exponential returns

3. Short-selling opportunities

Disadvantages:

1. High risk

2. Elevated chance of overtrading

3. A potential margin call

Ready to try crypto margin trading?

Crypto margin trading offers opportunities for increased market exposure, short-selling, and portfolio diversification. However, it also carries significant risks, including increased volatility, potential losses, margin calls, and interest costs. It is crucial for you to approach trading with leverage with a comprehensive understanding of its mechanics and associated risks. By following prudent risk management strategies, conducting thorough analysis, and staying informed, you can navigate the complexities of trading with margin and potentially capitalize on its benefits while safeguarding your crypto investments.

Remember, margin trading should be approached with caution and only be considered by those who are willing to assume the associated risks. By following the tips outlined in this article, you can make informed decisions and effectively manage the risks associated with this type of trading.

At Exness we offer a variety of tools and features that, when used responsibly, can safeguard your account while trading. Learn more about the different account types at Exness, and test some margin trading strategies on a demo account.

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Start trading

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.