Leverage trading is trading with borrowed capital. Leverage is the ratio between borrowed money and the initial capital used in a trade. Using leverage allows traders to open bigger long and short positions with borrowed funds. Bigger positions increase the trader’s exposure to the markets and contain more considerable risks and rewards. Leverage can magnify the position’s return in both directions and increase the risk of unexpected price movements. If you have a $100 initial deposit in your trading account and if you use a 20% leverage ratio or, in another name, 5X leverage, you can open a position worth $1000.
Traders can reach more extensive buying power by using leverage. Using borrowed funds to make smart trades can magnify the return, and traders can earn big with a small amount risked in a trade. Using leverage can free up capital. A trader doesn’t have to use all his capital and manage his balance in different trades. For example, if you have $1000 in your leverage trading account, you can split this capital among different positions. You can use $100 with 5X leverage and open five different positions in which the total amount exceeds $2500. You will still have an idle $500 in your trading account.
Take Profit can be seen as TP on the many trading platforms. TP is a price level where you want to partially or fully close the position. You don’t have to watch the screen all the time during a trade, you can enter your desired price levels, and the order will be triggered when the price level is reached.
Stop Loss is like Take-Profit but in the other direction and used in a miscalculated trade. If the market and price are not going in the expected direction, you can close your position. You can enter a stop loss order, and the order will be triggered at the desired price level.
Leverage can magnify the loss, same as returns. You can open bigger positions than your initial capital, but this may cause all your capital to be lost in one trade. You are advised to use the Stop Loss tool in every trade just to avoid deeper losses.
Crypto markets are not fully mature yet, and the total market cap is relatively small. It means that the crypto market is vulnerable and can be easily manipulated. It is a well-known fact that there are big investors in the crypto market with huge capital that they are called The Whales. The whales can use their enormous capital power to move cryptocurrency prices in a direction where they benefit most.
Sudden pumps and dumps are very common in crypto markets, especially with low-cap cryptocurrencies. Trading major coins bear less risk of being caught in a whale’s play. Small cap coins are easy to manipulate and should be traded with caution.
When you use leverage, you are borrowing money. So you have to pay interest or a fee for the funds you used. This is also another detail that traders should consider because the greater the amount borrowed, the bigger the fees and commissions will be.
Margin trading is very similar to leveraged trading, but the main difference is their meanings. Margin means the amount of money you borrow, so in margin trading, you can use 5X or 10X borrowed capital. Leverage trading is the ratio between the initial amount of funds and borrowed funds. Leverage can be explained with percentages, such as %20 leverage or %50 leverage, while margin is explained in multipliers such as 5X or 10X.
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