Home Learn Articles Chat room
  Bollinger Bands Margin trading: Vocabulary & Examples  

Margin trading: how to multiply your gains

Stay up-to-date

Don't miss new content and revisions.

We don't spam nor share e-mails

Chat with our community!

Join our community chatroom: join the #thetradingdojo:matrix.org room on the app!

Created with Sketch. Get it on F-Droid. Download on the App Store.

On desktops:
Launch now on your browser

Multiply your gains... And your losses! You can't have only the good side of the things!

Today I want to talk about leverage, aka margin trading.

Not all exchanges support this feature, check our list here!

What does trading on margin mean?

Margin trading order form

Here we have the margin trading order form. There isn't much difference than with the normal one, eh?
However, this is a whole different world, more risky, but with more opportunities: you will even be able to make profits when from price drops!

Put simply, trading on margin is trading with borrowed money.

Don't worry, you don't have to go to the bank or go out of your way to find a lender. Nor you will have to fill bureaucratic forms or pay high interest rates.
All the lenders are already registered on the exchanges, and this one will automatically select the lowest funding rate available:

Advanced funding option on BitFinex Click on the three dots next to the margin tab,
and select “show advanced options” to see this panel

The interests you will pay to the lender are variable: there are many lenders and each one has a time-limited offer, from 1 to 30 days. So, if you borrow money for more than one day, and that the lender wants his money back, the platform will automatically switch you to the next best offer available.
You can set your maximum-acceptable rate in the “(%/day)” field.

Can I borrow 1 billion, please?

It's unlikely that you could. First, even the biggest exchanges don't have enough reserve for that.
Next, and more importantly, the amount you will get depend of your margin account' balance: your money will be used as the collateral, a guarantee.

Each exchange has its own rule, generally you can borrow up to 2 - 5 times your available collateral.

Longing and shorting

How to open a long position

If you think the price will go up, you want to be on the long side.

Let say you have USD in your account, and think Bitcoin will rise: you open a long position by pushing the “margin buy” button.
This action will make you borrow USD: you play with more dollars than you really have, you are “long”.

How to open a short position

If you think the price will go down, you want to be on the short side.

Let say you have USD in your account: you trade Ethereum against US dollar. You think ETH will fall: you open a short position by pushing the “margin sell” button.
This makes you borrow ETH: you play with less Ethereum than you have, you are “short.”

Right after borrowing the coins, the platform sells them for you. If your prediction is right, and the price drops, you will buy them at a lower price and keep the difference: you make money when the price falls! Isn't that awesome?

Example of a winning short trade Idealized example

How to claim your position

As you use money that is not yours, you can not withdraw it from the exchange. Your position is kept open until you claim it.
Only after settling it, the profits of losses will reflect on your balance.

Protecting the lenders

Of course, you won't be able to lose the money you borrowed. Remember: the money you deposited in your margin wallet is used as the collateral.

If the market turns against you, and you lose the equivalent of this collateral, you will be force-liquidated. In fact, due to possible sudden market volatility and additional protection, you will be liquidated even before reaching this level.
Each exchange has its own level, and they vary of a notable degree. You must inform yourself about these, and should find them in the support or help sections.

There are two steps leading to the forced closing of your position:

What is a margin call?

Getting margin called, mean that the exchange contacted you (usually by mail) to ask to increase your collateral.
If you don't fund your margin wallet or reduce your position in a timely manner, some exchange liquidate you.

What is being liquidated?

If your losses are still progressing, your position will automatically be closed at market price.

Some exchanges have their margin call and liquidation at the same level! On these ones, being margin called equal to being liquidated.

Is trading on margin a good idea?

Using leverage should be used with caution, especially for beginners. Although I encourage you to test it with low amounts of money to get used to it, you shouldn't for the moment think that margin is the best way to make money: it can be the best way to lose it!

You should never use margin without using stop losses orders: you will learn them in the next chapter. Getting margin called or liquidated is a proof that you have big flaws in your risk management strategy, those things should never happen.

Comments

Should you have any question or remark, feel free to post it. I will answer you as soon as possible!


I want to receive cool and useful mails from The Trading Dojo
We don't spam nor share e-mails

  Bollinger Bands Margin trading: Vocabulary & Examples