In cryptocurrency, margin trading refers to borrowing funds with a set interest rate to trade with. After closing a trade, the borrowed amount plus interest is returned to the lender and the trader keeps the rest profit. Margin trading, also called leveraged trading, relies on a multiplicity factor called “leverage”. Furthermore, margin trading allows for both “longing” and “shorting”. In a long, a trader borrows funds, buys at a low price, sells at a high price, returns the borrowed funds with interest, and keeps the profit. In a short, a trader borrows funds, sells a high price, buys back at a low price, returns the borrowed funds with interest, and keeps the profit.
Margin trading is often seen as a double-edged sword where both gains and losses are magnified to the extreme. Unlike normal trading, margin traders have to deal with a liquidation price, where a position will automatically close to prevent the lender from losing money. The liquidation price is derived from the chosen leverage, and using a higher leverage will move the liquidation price closer to the position’s entry price. For example, entering a 2x leveraged BTC position at $7800 may result in a liquidation price of $8500, while a 50x leveraged position may have a liquidation price of $7850. The maximum leverage varies based on the exchange and specific cryptocurrency being traded. Margin trading on Huobi Global allows for a maximum 3x leverage on a select number of assets. This means you can trade a 3 BTC position with 1 BTC of capital in your Huobi Global margin trading account.
If executed correctly, margin trading can be a very profitable source of income. However, there are many risks involved and we wouldn’t recommend any kind of leveraged trading to a beginner trader. This holds true especially in the cryptocurrency market, where frequent fluctuations of 10-20% are considered normal. With this kind of volatility, it’s easy to get completely liquidated unless you follow a strict risk protocol. In this post, we’ll share five tips to keep in mind if you choose to give margin trading a shot.
1. Laddering Buys & Sells
While this tip also applies to normal trading, it’s even more important when margin trading because your whole position could potentially get liquidated due to a sudden spike or drop in price. These spikes are called short and long squeezes, and they’re designed to liquidate over-leveraged traders before a major price reversal.
In the screenshot above, we can see three examples of price squeezes.
- A — Bitcoin is in a clear uptrend causing traders to open more long positions. Market makers initiate a long squeeze causing a price dump down to $6100.
- B — Bitcoin is on a downtrend causing traders to open more short positions. Market makers initiate a short squeeze causing a price increase to $6500.
- C — Bitcoin resumes an uptrend causing traders to open long positions once again. Market makers initiate another short squeeze causing a price dump to $6100 before resuming the uptrend.
Now imagine if you had entered into a position with all your capital right before a price squeeze. Depending on your leverage factor, you would likely have been liquidated. Thus, it’s important to ladder into your positions and always be on the lookout for squeezes.
2. Stick to Your Strategy
Before you start margin trading, it’s important to have a strategy in place to minimize losses. A popular risk management strategy is the 1% rule, where you don’t risk more than 1% of your capital on a trade by using a stop loss order that automatically executes following a 1% loss. Keep in mind that profitable trading is all about winning 51% of the time. By using the 1% rule, you can be sure you won’t lose all your money on a bad trade.
3.Know Your Interest Rates
In order to margin trade, you’ll need to borrow funds from lenders on the platform. Thus, it’s important to know the interest rates for various digital assets. On Huobi Global, the daily interest rate for borrowing USDT is 0.1%, while the rate for BCC, ETH, LTC, ETC, DASH, XRP, EOS, OMG, and ZEC is 0.02%.
4. Watch the News
It’s no secret that news and developments have massive effects on cryptocurrency prices. As a holder, short-term news may not affect you much, but the same news could potentially liquidate a margin position.
Over the past year, we’ve seen quite a few news stories involving government regulation, exchange hacks, and more that impacted price heavily in the short term. If you’re in a margin position, make sure you stay up to date with the latest developments in the cryptocurrency space and act accordingly.
5. Keep Backup Funding on Hand
If you find yourself in a situation where you’re close to being liquidated, you have two options. The first option is to simply take the loss and reflect what you did wrong so you don’t make the same mistake next time. The second option is to deposit more funds into your account in order to lower your leverage factor, thereby moving your liquidation price further away from your entry price. Depending on the swiftness of your response and the market dynamics, having backup funding on hand to deposit in emergency situations could potentially save your whole account.
If you’re interested in learning more about margin trading on Huobi Global, visit Huobi’s official FAQ page. Remember to start small, have a risk strategy in place, and don’t get greedy.
Disclaimer: This post was sponsored by Huobi Global, a leading exchange that provides secure and reliable digital asset trading and asset management services to millions of users in over 130 countries around the world. Click here to learn more about Huobi Global.