Margin trading (or trading on margin) is a concept that many traders use to maximize their profit-earning potential. By trading on margin a trader may select an order size that is larger than the amount they have in their account. In other words, it means that a trader wants to trade on a certain cryptocurrency market and the exchange they use lends them some extra cash. They add this extra amount to the existing one to enter bigger trade positions.
In the traditional financial markets, the funds for margin trading are usually lent by brokers. On cryptocurrency exchanges, the funds are typically lent either by other traders or by a platform that provides the margin trading opportunities.
Please note that only the users who have verified Changelly PRO accounts may use the Margin Trading option.
The margin and the leverage
To place a margin trade, the trader will be asked to commit a percentage of the total order value. This amount is known as the margin. Another relevant concept in margin trading is the leverage. It describes the correlation between the borrowed funds and the margin amount. For example, to place a $100,000 trade at a leverage of 10:1, a trader would need to invest $10,000 of their capital.
When it comes to cryptocurrency exchanges, the ratios are typically set between 2:1 and 100:1, and the trading community often uses the ‘x’ symbol to represent the leverage (2x, 5x, 10x, 50x, and so forth).
At Changelly PRO the highest leverage is 10x. For some exchange pairs it is 5x.
Margin trading can be used for both long and short trades. While the margin trade is open, the trader’s assets act as collateral for the borrowed funds.
For instance, a long position with x10 leverage on the BTC/ETH market translates into an assumption that the BTC price will go up compared to the price of ETH. Each time the BTC price increases by 1%, the value of the position will increase by 10%. However, if the BTC price falls to such a level that the funds on the trader’s account can no longer cover the minimum required to keep the position open, it is then liquidated. You can find more information about the liquidation mechanism in this article.
Example
A trader opens a long BTC-ETH margin position, when 1 BTC equals to, let's say, 26.8 ETH. They set a margin amount of 1 BTC and the leverage of x10, the total position value therefore becomes 10 BTC. If the BTC price increases by 5% and the trader closes their trade right after this moment, their profit will be around 13.4 ETH. Some percentage of the total profit will be paid as an Interest Rate. You can read about Interest Rates in this article.
However, if a trader opens a trade of another type, their profit will equal to 1.34 ETH only, since the total value of the trade was 10 times lower.