Margin and Leveraged Trading – A simple explanation

January 4, 2019

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Margin/Leveraged trading is very attractive for traders as it helps a trader get higher return on the capital and helps take a bigger position than the amount of capital a trader has.

Many traders however have a tough time understanding margin trading and they end up losing money when they trade on margin. In this blog, we unravel margin trading in simple terms without making it complicated.

In simple terms in case of margin trading a trader only get his profit or loss on the coin. The trader will not actually get the coin but only the profit or loss from the time he enters the position to the time he exits the position.

This is different from buying a coin as in that case you actually get the coin but in case of margin-trading you will only get the P/L. Hence margin-trading is good for traders who are looking to profit from change in the price of the coin and don’t care about having or HODLing the coin.

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Delta Exchange – Margin Trading Platform

Futures trading and margin trading are similar from a traders point of view. In both the cases trader get P/L and not the actual coin and both have leverage. Futures usually have higher liquidity and don’t have daily funding as in case of margin – hence I find futures trading a better alternative to margin trading.

How it actually works – An example

So let’s say price of Ether is 100$ and a trader believes that Ethereum is going to go to 110$ in the short term. He decides to go long Ethereum futures on Delta Exchange with 20X leverage. Since the leverage is 20X the trader is required to keep 100/20 = 5$ worth of ETH or 0.05ETH with Delta Exchange to open this position.

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Now if the price of ETH goes to 110$ and trader closes the position he makes a 10% profit or 0.1ETH profit on his position. The trader has however invested only 0.05ETH for trading ETH futures on Delta Exchange, which means that his return on capital is 200%.

If instead the price falls to 95$ then the trader has made a 5% loss on his position. This would mean that the funds 0.05ETH that the trader has kept with exchange are not enough to cover his losses. At this point if the trader does not add more margin to his position the exchange will liquidate his position. In other words his position is closed to make up for his losses. This would mean that the trader will lose the entire 0.05 ETH that he had kept with the exchange.

When to trade using Leverage

If you goal is to target from the price movement of the coin in the short term, you should consider margin trading. If however, you want to buy a coin for a long term for investing purposes or if you are accumulating the coin for some utility of the coin, in that case you should actually buy the coin from some spot exchange.

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