Curious to know about Margin Trading? Well, today we are going to enlighten some of the facts about margin trading advantages as well as disadvantages.
We all know that trading in cryptocurrency is both risky as well as rewarding. On needs to be smart and learn the basics before putting a considerable amount of money on it.
You need to understand that there is an equal risk of your initial investment getting reduced to $100 in a day or two. That’s true. So, it becomes essential for us to discuss a necessary concept in trading which can be both risky as well as rewarding. However, it’s not at all bad if you use it correctly to achieve your investment goals.
So, let’s get started with the first question which comes to your mind and, I.e., what is margin trading?
What is Margin Trading?
Margin Trading is an act of borrowing additional money or cryptocurrency by leveraging the number of cryptocurrencies which you already own to buy other cryptocurrencies.
In simple words, Margin Trading is an account offered by brokerages that allow investors to borrow money to buy securities. The concept of margin trading was born in the US and is now practiced as numerous exchanges around the world. It has been incorporated in the cryptocurrency world too.
However, in the traditional markets, there are a lot of rules and regulations on the Margin Trading, while the cryptocurrency margin rules are quite simple and not as complicated. However, the basic operating principle remains the same.
Pros of Margin Trading
Necessarily, there’s no reason to fear about margin if it is done correctly. Here we will put some of the lights on the pros as well as cons on Margin Trading.
Let’s review the pros of Margin Trading without wasting further time.
1. Enhancing our Buying Power
One of the most apparent advantages of Margin Trading is to control a much larger position by borrowing from your broker than you could by just using your existing equity.
2. More Flexibility
Trading with Margin gives you the advantage of taking more significant than usual positions; however, it also offers you the flexibility to build a portfolio. Here we take an example: let’s assume that you have a small account, and because of it you can only take 1 position at the time; now with the margin trading you can easily be able to use your equity to open more than one trade at a time. Thus, it gives you the opportunity to diversify your trading in various instruments on a daily basis.
3. Exponential Account Growth
Before the existence of Margin Trading, it was quite a difficult task for small retail traders to grow their account rapidly as because they could only take positions as big as their account balance. Therefore, managing all these positions and day trading various instruments became difficult, if impossible for the small traders.
Now trading with Margin offers you an opportunity to take over the various markets at the same time during the day, thus profiting from more trades as well as exponentially growing your account to a more manageable size.
Cons of Margin Trading
At all extent, it’s always been a great thing to trade with leverage and borrow capital from your Broker to trade bigger. However, you need to know that there a lot of limitations from trading with margin; which is possible but manageable if you’re disciplined.
Let’s have a look at some of the cons of trading with Margin:
1. Increased Risk
It is one of the most obvious disadvantages of trading with margin. Now, to be able to control a much larger position than usual means not only that the profits can bigger, but losses are also more significant. This the reason why you must be careful and stick to very stick risk exposure as well as money management rules while using margin.
Majority of traders can’t handle the stress of having a too large of a position open because the fluctuation in their unrealized profit or losses is too significant which makes them take irrational decisions. If your emotions get in the middle while you are taking trading decisions can make you lose money in the long term; if you can’t handle significant fluctuations on your PnL, then you need to start with smaller positions sizes.
3. Margin Calls
Last but not the least, to get a margin call from your broker means that your equity is quite low that it can’t support the minimum margin requirements from your broker and your trade will be closed with the loss – leaving you with a tiny percentage of your initial equity.
Now, to accurately know what a margin call is you must realize that this only happens with terrible money management and you must never risk that much on a single trade. We already know that you can open a prominent position with just a small percentage of its actual value because of the leverage provided by your broker.
However, this doesn’t mean that you can only lose the small percentage of your broker requires as margin to open the position. If you don’t use a stop loss level, your entire account can be wiped out.
Undoubtedly, Margin trading and buying on margin help building traders and investors to make stock market trades as well as investments with low funds. However, traders should also be careful while picking up their deals just because the loss is just as much amplified as the profit.
You must evaluate your risk appetite before trading for best results even during the tough times. If you’re among those who are lack enough funds to make a big trade, then you too can opt for margin trading or buyout the stocks on Margin.…