Key lessons learned:
Margin trading combines elements of spot and futures trading to allow investors to trade cryptocurrencies with leverage.
Unique to margin trading is the ability for users to invest multiple assets as collateral to trade with leverage, including BTC, ETH, BNB, BUSD, and USDT.
Margin trading opens up arbitrage opportunities in the futures market, especially when funding rates fluctuate.
After tracking or trading on the cryptocurrency market for a while, it is possible to do spot and futures trading, the idea of margin trading may have caught your attention. Margin trading not only offers an interactive experience but can also become a successful source of income when a strong risk management strategy is implemented.
Margin trading requires experience and knowledge of how the market works. Binance makes margin trading easy by providing some of the best options and learning materials for crypto traders. In this article, we will discuss why margin trading could be a good option for you.
What is margin trading?
Margin trading combines elements of the spot and futures markets to allow investors to trade cryptocurrencies with leverage. Similar to spot trading (directly buying or selling assets), escrow involves the instant exchange of digital assets. The main difference is the ability to incorporate leverage into these trades, multiplying the trade value anywhere from 2X to 10X, the better with futures contracts.
Margin trading also has its own characteristics beyond these two basic concepts. For example, to use leveraged funds, traders must allocate collateral and choose the desired leverage they want to use on their positions.
Traders must be wary of market changes that occur when trading on margin, as margin calls can happen frequently, especially with cryptocurrencies. A margin call occurs when trades go unfavourable, potentially costing the trader large amounts of money, depending on their leverage.
In such cases, the exchange will execute a margin call where the trader has two options: Reduce the size of the position or add more collateral. To avoid liquidation, a trader can reduce the position’s nominal exposure, reducing the position’s leverage. Alternatively, traders can allocate additional margin to the trade to prove they have enough funds to continue managing the trade.
Margin trading is used in a number of cases, but one of the most common uses is to hedge a portfolio or other asset. Hedging associated with opening new positions is negatively correlated with existing positions. Investors and traders protect their portfolios as a form of insurance to minimize possible losses.
While margin trading can make you big profits, this should never be done without implementing risk management strategies like using stop limit orders. Otherwise, small market changes can be costly for the trader. Just as one can find success with high leverage, one can also incur a similar loss.
3 reasons why you should try margin trading
Strange couple – Margin trading provides access to exotic trading pairs. This involves two cryptocurrencies paired together (e.g. BTC and ETH). Instead of buying or selling these digital assets, traders can speculate on the relative performance of the two. With Binance, traders can trade pairs with up to 10X leverage. Keep in mind that the more volatile the token, the lower the market liquidity will be. This is because the asset is less reliable to bet on, causing fewer deals to be established on that market.
Multi-property collateral – Unique to margin trading is the ability for users to invest multiple assets as collateral for leveraged loans. On Binance, this can be done in cross margin mode. Instead of just allocating BTC to BTC-based margin trading, investors can use BTC and ETH, or BUSD, USDT, etc. to determine their collateral. Allocating multiple assets as collateral allows traders more flexibility when opening trades.
Specializing in arbitrage trading – Margin traders can take advantage of arbitrage opportunities when funding rates on futures pairs fluctuate. For example, when BTC/USDT perpetual funding rate is negative, user can use margin to sell trades with BTC/USDT while entering long futures BTC/USDT perpetual trades for profit with low risk. Therefore, traders are not necessarily dependent on the price of the underlying asset, but are more concerned with market actions. Since the two trades are placed in opposite directions, it doesn’t matter what the market trend is, minimizing the risk for the trader.
How to open a margin trading account on Binance
Anyone can easily start margin trading on Binance. First, create an account, make sure to verify your identity and enable 2FA. You should then be ready to begin the process described below as long as you do not reside in a restricted country.
Step 1 – Click on the drop-down menu labeled [Trade] located at the top panel of your screen; and click [Margin].
Step 2 – Before you start trading, please note that you are required to complete a short test. All users must reach 100% score before margin trading.
Step 3 – You will then be able to transfer funds to your new Margin Trading Wallet. For example, you can transfer BTC, ETH and BNB from your Exchange Wallet to your Escrow Wallet. These funds will act as collateral for any loans incorporated in the margin trade and determine how much capital you can borrow.
Step 4 – Click [Borrow/Repay] and enter the amount you want to borrow. Please note the hourly rate and click [Confirm Borrow]. The amount will be credited to your escrow account (can be checked under your balance/margin button). The balance dashboard comes with a margin measure that relates to the risk exposure of your borrowed funds, the collateral you hold and the market value. Margin level can be calculated as follows: Margin level = Total asset value / (Total borrowed amount + Total interest payable)
Step 5 – If your margin falls, you need to increase your collateral or decrease your loan. Margin level 1.1 will automatically liquidate your account, in other words, Binance will sell positions at market price to repay the loan.
For more in-depth guidance and how to repay, please see our Academy article on Binance Margin Trading Guide.
Margin trading can expose traders to opportunities not available in other forms of trading. When margin trading has purpose and attention, it can turn out to be an enjoyable and profitable endeavor.
As said earlier, margin trading should be done by people who are experienced in trading. Traders must understand the risks involved in margin trading. Useful tools such as stop orders should be used whenever possible. To any extent, the options discussed above with trading margin are possible through Binance.
Read the following articles for more information on margin trading:
Disclaimer: Crypto assets are volatile products with a high risk of losing money quickly. Prices can fluctuate significantly on any given day. Due to these price fluctuations, your holdings can significantly increase or decrease in value at any given time, which can result in the loss of all the capital you have invested in a trade.
Therefore, you should not trade or invest money that you cannot afford to lose. It is important that you fully understand the risks involved before deciding to trade with us based on your financial resources, level of experience and risk appetite. If required, you should seek advice from an independent financial advisor. The actual profits and losses you experience will vary depending on many factors, including but not limited to market behavior, market movements, and the size of your trade. Past performance is not a guide to future performance. The value of your investments may increase or decrease. looking for more information here.
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