Understanding the concept of leverage trading as a trader or newbie in the cryptosphere is necessary to maximize gains and minimize losses. It doesn’t matter the broker or centralized exchange you’re leveraging with, concrete understanding of what leverage is all about is needed before venturing in to Futures Trade especially for crypto traders.
What is Leverage Trading?
In crypto trading, leverage refers to using borrowed capital to make trades. Leverage trading can amplify your buying or selling power, allowing you to trade larger amounts. So even if your initial capital is small, you can use it as collateral to make leveraged trades. All truths parallel, leveraged trading can multiply your potential profits, it can multiply your potential losses as it is also subject to high risk – especially in the volatile crypto market.
The amount of leverage is described as a ratio, such as 1:5 (5x), 1:10 (10x), or 1:20 (20x). It shows how many times your initial capital is multiplied.
Leverage Trading Example
For example, imagine that you have $100 in your exchange account but want to open a position worth $1,000 in bitcoin (BTC). With a 10x leverage, your $100 will have the same buying power as $1,000. But keep in mind that the higher the leverage, the higher the risks of getting liquidated.
Imagine you want to open a long position of $10,000 worth of BTC with 10x leverage. This means that you will use $1,000 as collateral. If the price of BTC goes up 20%, you will earn a net profit of $2,000 (minus fees), which is much higher than the $200 you would have made if you traded your $1,000 capital without using leverage.
However, if the BTC price drops 20%, your position would be down $2,000. Since your initial capital (collateral) is only $1,000, a 20% drop would cause a liquidation (your balance goes to zero). In fact, you could get liquidated even if the market only drops 10%. The exact liquidation value will depend on the exchange you are using.
Leverage Trading For Beginners
As a beginner or a newbie who is just employing the strategy of leveraging, to avoid being liquidated, you need to employ the principle of “Dollar Cost Averaging, DCA” or add more funds to your wallet to increase your collateral. In most cases, the exchange will send you a margin call before the liquidation happens (i.e., an email telling you to add more funds). Don’t over leverage because of greed and it is adviced you learn with small amount.
Leverage Trading Platform
Leverage trading platforms when it comes down to cryptocurrencies has to do with any Centralized Exchanges (CEX) that supports leveraging. The most popular of all CEX is the Binance platform, Kucoin, Phemex, Okex, e.t.c., all these are platforms where you can register and start your leveraging journey.
What does leverage mean in trading?
Leverage has to do with borrowing money from exchanges to add to your initial capital in order to trade larger amounts and amplify your potential profits.
Is leverage trading a good idea?
Leverage trading is a good idea as it helps traders with low capital to take a large position size from borrowed funds and maximize profits.
What is a good leverage to trade with?
Depending on the capital, a good leverage shouldn’t be more than 10x the initial capital. The higher the increase in leverage, the higher the liquidation price and the higher the chances of loosing the trade and capital.
What is 20x leverage
Leverage are expressed in ratio of 1:10, 1:20, e.t.c. A 20x leverage is leveraging 20 times your initial capital. For example, if your initial capital is $100, a leverage of 20x is 20 times of $100 which is $2000. So the trading capital will be $2000 instead of $100.