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What is Leverage?
In today’s world, crypto trading has become one of the fastest ways to generate wealth. A lot of people have jumped on the bandwagon, but there are some tools and techniques that people are not aware of, one of these trading techniques is known as ‘Leveraging’. If you’re not aware of this concept and how to trade using it, read further. This article contains all you need to know!
Before understanding this concept, imagine this, you’re buying a car. The process would include a down payment of a certain amount (say 12%) and the rest is being borrowed from the bank which you’d have to pay back with interest.
Using that analogy, let us see how leveraging works.
When you want to trade with larger lots but do not have the funds, exchanges give you the option to leverage to trade using a bigger volume. If you have $100, you could trade with $10,000 or even $100,000. While this may sound absolutely bizarre, there is a big risk that you are taking upon yourself while borrowing so much money.
We can further understand the risks and rewards using an example below,
Imagine you have $100 and want to buy Bitcoin which is priced at $10,000 per coin.
If you did not use leverage, you’d be able to buy 0.01BTC, but with a 10x leverage, your total capital would be $1000, thus you can then buy 0.1BTC.
You need to have some minimum collateral in your account against which you are borrowing money. If you have $100 and want to invest $1,000, then you need to 10x your current amount, or use the ratio 1:10. The minimum amount needed would be 1/10*100, which would be $10.
As your leverage is higher, your minimum amount would become less.
Case 1 - Profit
The price of BTC went up to $11,000. Without leverage, you’d have a profit of $110, but with leverage, you’d have $1,100.
Case 2 - Loss
The price of BTC went down to $9,000 Without leverage you would have lost $10 but with leverage the loss would be $100.
Thus, with leveraging, both profit and loss can be greatly magnified.
Leveraging does come with a catch, and that is liquidity. If this concept is not understood then investing using leveraging will only mean loss. When you lose money, first the minimum amount of money deposited will be depleted and once the balance is empty, the account will go under liquidation. This means automatic selling in short.
When you leverage by a lot, your collateral is less, thus a movement of even 1% could activate liquidation. If you want to avoid it, you’ve got to keep adding more money to your account.
Advantages of Leveraging
~ Coherent Trading – Allows accessibility to larger positions for more efficient trading.
~ Easy Diversification – As you can maximise your returns, you have the chance to distribute money in your portfolio.
~ Quick Profits – With leveraging, even small movements can bring very high returns.
Disadvantages of Leveraging
1. Huge Loss Risk – Even a small movement in the market against you can start liquidation in your account.
2. Interest fees – When trading using liquidation, you have to pay fees every time you trade. These fees can at times be extremely high, and this might blow your account. Check for interest calculators on your platform and see if you can afford the fees.
3. Psychological Tension – With a higher amount of money at risk, as humans, the anxiety will rise. In this case, if there is any mishap, then there can be serious consequences. Thus, this can result in high stress and sleepless nights.
4. Revenge Trading – Another way one can blow up their account is via revenge trading, which means that you get frustrated at the market for giving losses and you keep trading until you win. In most cases, people lose and go broke.
How to Get Started with Leveraging?
~ Pick a trusted exchange like BitDelta.
~ Understanding the math and theory behind leveraging is essential to make profits. Once you know how the system works, you’ll know when to jump into the market and when to hop out.
~ As a beginner, starting off with very little capital or, even better, using a demo account to learn HOW to trade is always recommended. This is quintessential.
~ Never forget about risk management techniques.
Risk Management Techniques
1. 3% Rule – Always invest 3% of your capital in each trade.
2. Use TP and SL – Deciding your stop loss and taking profits makes trading way easier as you know the maximum amount you can win and lose. This also helps psychologically.
3. Trust Patterns – Make sure you are waiting for the patterns to be formed. Do not make assumptions while trading.
In conclusion, Leveraging is a powerful technique which increases your profits by a significant amount, but this also means that your losses will also be huge.
Being confident in your trade is paramount while trading. Keep educating yourself more and more about leveraging and other such techniques.
Keep practising trading and stay consistent, that’s the only thing that will propel you forward.
Risk Management will stop you from flatlining your account. Be careful in the trading space, while it may seem like a cash grab, there is a lot of work and effort that goes into this. Stay relaxed and focused!