Easily put, Margin is a loan. Margin Account is one that allows you to receive such loans to help leverage your funds. And Margin trading also known as Leveraged Trading is the practice of borrowing money from a broker to leverage an investment or asset. In other words, MT is used to buy or sell more stock or cryptos than the trader would be able to afford otherwise.
Traders that would like to take a position in a market (that they honestly believe will skyrocket in the near future), but do not have enough cash to do so, can access more funds by borrowing from brokers to leverage the amount they do have.
One of the benefits of having a Margin Account is that opportunities may arrive without notice, and traders may have immediate access to funds and make a profit on the spot, like Spot Trading.
For Margin Accounts, traders are required to put a “down payment” or minimum margin, that may vary according to the brokerage firm or cryptocurrency exchange, and the brokers will give you a ratio that will be applied towards whichever amount of money you have put down. If the ratio is 2:1 it means that if a trader was to put down 2,000 (for ex.), the brokers will leverage it by doubling its base amount. (2:1 Ratio; 2,000 = 4,000).
In Europe, the UK and Australia, according to Rob Booker a trading expert at Forex, some margin accounts have ratios of 100: 1. You put down 1,000 and it will get leveraged to 100,000. Woah!
Traders can keep their loan for as long as they want, as long as they are keeping up with their responsibilities. And brokers get their money back and interest fees automatically the moment you make that $$$.
Here is a simple example of how it works:
If things go according to the plans, margin trading can be astoundingly profitable, you get to pay your loans, the interest fees and pocket a great profit, but if things do not take the highs expected do you see how bad this can get? Not only will you be left with a debt of the money you borrowed and lost, but you will also lose your down payment, plus you will have to pay out of your pocket for the interest fees.
“Margin trading is a double-edged sword, capable of amplifying great profits or causing extreme losses.” — Sal Miah
MT is only recommended for skilled traders and investors, it requires technical analysis skills, even though it appears to be an uncomplicated concept, and inexperienced traders may feel safe in being RISKY.
Traders must verify they are apt to trade on margin — they must earn eligibility by completing a margin account application with the exchange of your choice (or brokerage firm) where brokers will review your credit, net worth, estimated liquid net worth, annual income, debts, credit card history, etc. to decide if you have the financial stability to manage a margin account. Once you have been approved, you will be subject to the rules of an authorized financial and regulatory organization and Security Exchanges according to your country, like FINRA and the New York Stock Exchange in the U.S.
These are no courtesy calls, oh no, Margin Calls put extra pressure in the game, and you should be aware once you decide to part take in Margin trading.
Margin Calls are demanding requests from your broker to raise the amount of equity in your account whenever prices threaten to go lower and lower. They usually give you a couple of hours or days (and you are not entitled to extra time) to come up with the money, and if you fail to do so, they sell your shares for you.
• Be prepared for the volatility by holding a cash cushion, you can have the extra cash in your account or ready to be added to it in case any of these circumstances emerge.
• Make sure to stay on top of your account, monitor it well and set up alerts to notify of price drops.
• In case you cannot make a plan and prepare for this sort of emergency, this should be a sign that you may not be prepared to enter this kind of trading strategy, yet.
Margin Trading for Cryptos
In the stock market, when well executed, MT is a success because it is dealing with consolidated markets, but that isn’t the case when it comes to the cryptocurrency industry.
Margin Trading even though available in many exchanges, it may only be safe when trading on the spot because the market´s movement is drastic and contrary to the stock market it is unpredictable.
If you decide to register for a Margin Account at an exchange, make sure to read their terms, conditions, and ratios for Margin accounts.
Final Thought: Recognizing the potential risks and conditions of holding and sustaining a margin account is the first step to getting started and evaluating if, in fact, this is the path for you.
If I seem as though I want to scare you away from Margin Trading, it is because I do. (LOL) If you are prepared to do so, nothing can stop you and any precaution is all for your gain, but if you are not you should be scared.
Please note that Margin trading is a privilege and not a right to anyone.
Disclaimer: Our team works hard to bring you the best content in the cryptocurrency market, but it is only our point of view and not legal advice, and may be divergent from other opinions, so please do not make any decisions without concluding studies of your own to understand the profit possibilities and uncertainties involved at your own risk.
First Published at Winco.io