If you’ve been in the crypto trading industry for a while, you’ve probably mastered how to look at the data on the board and expect when there is going to be a price rally. The problem is that you don’t have enough money to back it up, making you feel like an opportunity to earn a huge profit is passing you by.
This is when leverage trading comes into the picture. You can use leverages in crypto to multiply your investments and eventually amplify your profits. You can consider it a borrowed allowance if you can guarantee you can pay it back with the profit you earn.
Before using this tool in crypto trading, you need to understand many things. If you want to learn more about leverage and how to use it to your advantage, then you first have to learn how it works.
Leverages in Crypto Trading
In crypto, leverage functions like a loan. Leveraging is just borrowing money for a trade to multiply your potential profits. However, how much you leverage from your platform may vary. Leverages may go as low as 3x to as much as 400x, depending on your risk appetite.
When you look at charts and notice that there might be a potential profit, your first instinct is to invest your money into it. However, there will be instances where your budget falls short of the market price. The solution for this is to ask for leverage from your broker to supplement the margin from your assets with the leveraged position you want to reach to start trading.
A ratio of 1:5 (5x) would mean that your $100 would have the same buying power as $500. This will effectively multiply the value of your trade, increasing the profits you may have. However, note that if the market goes against you, you may lose your deposit.
Risks
As leveraging involves more than just your own funds, it is crucial to note the risks. Leverages usually come with maintenance thresholds and margins to consider. Maintenance thresholds are the level at which your deposited funds, which are your collateral for the borrowed money, are liquidated.
Put simply, they sell your position when it reaches too low to minimize risk. These thresholds may vary depending on the leverage. The higher the leverage, the higher the threshold, meaning that if at a 5x leverage, the maintenance threshold is at a drop of 10%, a 20x leverage may liquidate at a 5% drop.
However, if you earn a win, like opening a position at $5,000 with leverage of 10x, the deposit required would only be $500. If your trade is successful and earns you a profit of 10%, your profits would be $500 instead of only $50 if you didn’t leverage and only used $500 to trade. Big wins, big risks.
How to use Leverages
Once you have decided to use leverage in crypto trading, you can then proceed with depositing funds into your account. This will be your initial capital, and your leverage will supplement the margin that is left as collateral. There are two types of leverages that you can use in crypto trading; long and short positions.
A leveraged long position is used when you expect the price of your asset to go up, while a leveraged short position is used when you expect the price of the asset to go down. This may sound like a regular crypto trading process, but the difference is that you can trade assets using only your collateral and not your holdings.
Long Positions
If you sense an upward trend, like the end of a bear market, or a pattern that would indicate such, then long positions are used. To leverage a long position, you must choose a leverage amount, like 10x. Your deposit would now then be worth 10x more. You should then decide when you want to exit and reap your profits before things start to go down again.
Long positions are what most people view trading as, and this is the most common form of trading. You can stick with long positions and make a generous profit without looking at short positions.
Short Positions
Leverages are often used in short positions, as shorting with your own money doesn’t make much sense when you’re just starting off. You may short your own money when you have existing holdings, like selling $100 worth of BTC to rebuy the same amount later at $80. You will have kept the same amount of BTC holdings but were able to extract $20 from it.
With leverages, your profits from shorting are higher than just extracting a fraction of your existing positions. For example, if you decide to short $1000 worth of BTC with a leverage of 20x, your deposit is only $50. You sell the $1000 worth of BTC and wait for the price to go down by 10%; you rebuy the same amount of BTC for $900 and repay your borrowed BTC amount. You then get to keep the $100 difference because that is your profit.
Create a Decode Account Today and Get FREE $DECODE! Scan the QR Code Now!
Decode Coin is the cryptocurrency made by the Decode Group, a financial services company that offers educational training, foreign exchange services, and fund management, with two decades of experience.
The Decode Coin ($DECODE) aims to be the most trusted currency used in the Financial Service industry, being used to settle all fees such as transaction fees and referrer fees. $DECODE may soon be used as a payment for all transactions within the Decode Group and over 50 partner establishments worldwide.Visit decodeex.com/promo, Register and Verify your Email, Sign-in and Input your ERC-Wallet, Submit KYC requirements, and that’s it! You will be AIRDROPPED your FREE 500 $DECODE within 24 hours.