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Leverage and Margin Explained
Leverage allows you to trade and profit from volumes larger than would be possible if using only personal funds, thus maximizing profit potential. Margex offers both isolated and cross margin systems.
Leverage Trading (also known as Margin trading) is a form of trading that allows traders to trade with volumes much larger than their own capital, thus maximizing profit potential.
Leverage trading is done by means of Long (Buy) and/or Short (Sell) trades called - Positions, which allows traders to profit from both rising and falling markets alike.
Leverage reflects the amount of personal funds required to open a position compared to the size of the position i.e 1:10, 1:50, 1:100, etc.
For example, if a trader wants to make a trade with BTC with 1:10 leverage, then only 1 BTC of personal funds (i.e. Margin) will be required to open a position of 10 BTC. As seen from the example, this allows traders to increase their exposure in the market thus maximizing profit potential.
Margin is the amount of a trader's personal funds which are required to open a leveraged position.
At Margex leverage can be set from a minimum of x5 (ie. 1:5) to a maximum of x100 (i.e. 1:100).
One of the two main strategies in margin trading is Long buying. Long buying means that an asset is bought at a LOW price with the intent to resell the asset at a HIGHER price when its price increases. In other words, Long buying strategies are - buying LOW and selling HIGH.
Let’s take a look at an example of a Long (buy) trade:
Trader opens a 1 BTC Long (buy) position at the price of $10,000 with 1:10 leverage , which means that only 0.1 BTC ($1,000) of the trader's personal funds (i.e. Margin) are required to open this position.
Now, the price of 1 BTC increases to $11,000. Trader now closes this position with a profit.
The results of this Long (buy) trade are:
- Trader bought 1 BTC at $10,000 and resold it at $11,000 resulting in a profit of $1,000
- The $1,000 profit is now added to Traders Wallet balance and can be withdrawn or used for further trading
In this case, Profit or Loss made by the trader is the difference between the price at which they bought the asset initially and the price at which they re-sold the asset. As shown in the example, Long trading strategies are better suited for uptrend markets, due to the price of an asset rising, allowing traders to buy at a low price and later re-sell the asset at a higher price, thus booking a profit.
The second strategy in margin trading is Short selling. Short selling means that an asset is sold at a HIGH price with the intent to re-buy the asset at a LOWER price, when its price decreases. In other words, Short selling strategies are - selling HIGH and buying LOW.
Let’s take a look at an example of a Short (sell) trade:
Trader opens a 1 BTC Short (sell) position at the price of $10,000 with 1:10 leverage, which means that only 0.1 BTC ($1,000) of the trader's personal funds (i.e Margin) are required to open this position.
Now, the price of 1 BTC decreases to $9,000. Trader now closes this position in profit.
The results of this Short (sell) trade are:
- Trader sold 1 BTC at $10,000 and re-bought it at $9,000 resulting in a profit of $1,000
- The $1,000 profit is now added to Traders Wallet balance and can be withdrawn or used for further trading
In this case, Profit or Loss made by the trader is the difference between the price at which they sold the asset initially and the price at which they re-bought the asset. As shown in the example, Short selling strategies are better suited for downtrend markets, due to the price of an asset falling, allowing traders to essentially hedge their assets protecting, them from depreciation in value.
On Margex, we offer both Isolated Margin and Cross Margin systems, providing traders with the highest amount of flexibility, control, reliability and better risk-management options when trading.