This post is also available in: Deutsch (German)
What is Leverage Trading?
Leverage trading is a high-risk undertaking if you don’t do it well. It is offered by various brokers or trading platforms and each implements a different type of leverage design. In essence, leverage trading can be broken down to the broker “lending” money to the trader. It significantly increases the potential gains and losses and gives the trader a far greater exposure compared to what he would have with his initial capital.
The true meaning of leverage could be explained as operating with more money than you have. For example, if you trade with 100x leverage for every $1 you will be given the power to trade with $100. The opposite effect is also in place – there is a leveraged probability of losing.
Trading cryptocurrencies is considered high risk, especially with leverage!
How leverage positions work in crypto
Each trading platform has its own limit on the available leverage. The amount of leverage you decide to use also depends on the initial margin buffer you can provide (or the amount of BTC you must deposit and hold in order to open and keep a position open)
Leverage trading bitcoin and other cryptocurrencies consist of two main options – Long and Short.
Going long means you’re essentially buying a contract because you think it might increase in value.
Going short means you’re selling a contract because you think the price might tank and you want to cash in on the falling market.
After a position has been opened, depending on how big it is, a proportional amount of your total balance will be held as collateral for the funds you used for the leveraged trade.
Closing the trade at profit – the collateral is returned to you, together with the profits made on the leveraged amount.
If you close the trade at loss – part of the funds from your collateral will be taken from you to compensate the platform and your starting balance will shrink.
If you’re at loss and the market continues to move against your position, you will eventually meet the liquidation price and your positions will be forcefully closed together with the collateral liquidated.
The importance of properly setting up a position
Opening positions on leverage trading platforms is quite easy but at the same time, it’s mandatory to know the markets and how to use every safety option available in order to minimize the risk of being liquidated.
In order to open a position on platforms like ByBit you must know which order type to chose as it will be dictating your trading strategy.
There are different order types such as Market Order, Limit Order, Stop and One-Cancels-The-Order (OCO).
If you want to have а proper control over your margin and open positions you need to understand how the different types of orders work since leverage trading is considered as risky and there’s a risk of your entire capital being liquidated.
For a beginner, it is crucial to understand the market order and limit order as well as knowing how to place a tight stop loss and take profit. They may play a very important role in your potential profit or your potential loss from your positions.
A Market Order is when you place a buy or sell at the current price of the asset that you want to open a position on. Market orders are executed instantly at the best available price on the corresponding order book.
A market order should be used only if there’s enough liquidity on the market to soak up your buy or sell without causing a price sway.
The order book is filled with buy and sell walls that have small increments in-between the asking prices.
If you’re trying to place an order on an illiquid pair, you might end up at a huge loss.
If you trade with more than the market is able to handle, your Market Order will be executed at the best price, then move down to the second-best and so on, until your requested amount is filled.
A Limit Order is when you place a buy or sell at a certain price target that when reached will open a short or long position.
They’re a safer option on illiquid pairs since no price sway can occur.
The limit order isn’t instant, however, it doesn’t move up or down on the order book and executes at your set price.
You set a price at a certain price target that when reached will open a short or long position. For example, if the current price of Bitcoin is 10 560$ and you want to enter a long position but know that the price may fall down to 10 350$ you set a buy order for 10 375$ per BTC. When the price is reached you will automatically enter a long position.
How to open a long or short trade?
Opening a position on most crypto leverage trading platforms consists of 5 steps.
- Click on the designated buttons for buying or selling on the order tab. There you will find the available order types – Limit, Market and Conditional.
- Choose the level of leverage from 1x to 100x through the designated slider. The leverage is variable depending on the asset that you chose to trade – BTC, ETH, EOS or XRP. They all have different leverage exposure in most of the cases.
- Select your order type. This prompts you to input a target price.
- Once the order is filled, the position will become active, from there you can still adjust the stop-loss or take-profit manually
- You can close the open position at any point in time by clicking on the X on the right side of the positions tab.
Does leverage trading bitcoin work differently on each platform?
It all depends on the order matching algorithm behind the platforms and how the leverage is designed to work. Each platform exceeds in a different type of strategy. A noticeable difference in how leverage and positions work is on Bitmex and PrimeXBT.
On Bitmex, every open position works in an isolated margin and it is independent of the other open positions.
Cryptocurrencies are still very volatile and the way leverage works on BitMEX provides slight protection from unwanted liquidation.
On PrimeXBT, for example, opening a position consists of used margin and available margin. The used margin is the cost of all current positions open and available margin acts as a buffer for the leverage you’ve used.
If your trade starts going in the opposite direction, your available margin will fluctuate in order to cover the potential losses.
It is recommended to keep at least a 90% available margin to avoid liquidation.
In some cases, if the market turns to the opposite direction you predicted but all of the indicators you’re using to do a research point towards your initial position – you might need to add more margin to avoid liquidation.
This is a risky practice and is considered a double down. Almost every platform allows for adding additional margin after opening a trade.
Stop Loss and Take Profit on Leverage Positions
With 100x leverage, the liquidation level is very close and without a proper stop loss and take profit in place the odds will be against you most of the time.Flash crashes sometimes happen in cryptocurrency trading and having sufficient available margin and a quick reaction to add to it may save you a fortune.
However, that could be easily avoided by using Stop Loss
Good position management – yield good results
Learning to properly manage a position, especially when trading with high leverage is crucial. It can be the difference between success or failure, of course, this is only one part of the whole equation as there is more. Learning how to read charts and indicators is very important as you must know when to open a position. After that, you need to manage it with a tight stop loss and take profit set accordingly to your strategy.