Cryptocurrency Margin Trading Tips

Crypto margin trading is treated like a godsend by those who get to grips with it, and as the devil by those who have been burnt by it (or heard horror stories detailing as much). In essence, it is the act of “borrowing” funds from a 3rd party to increase the amount you can trade with, and thereby, amplifying your potential returns – but also your potential losses. Margin trading also adds another valuable tool to your arsenal with the ability to short the market, allowing you to hedge against a market downturn.

Margin trading opportunity

You can margin trade on Huobi, which you can find out more about here. Other trading sites such as BitMEX exist and allow trading with leverages up to 100x, but such a high level of leverage is most definitely not recommended for anyone starting out.

With margin trading being a little riskier than traditional trades, here are a few tips on margin trade to keep in mind.

Have backup funding

If you’re unfortunate enough to get margin called (when the exchange demands you deposit more funds to cover for potential losses), it’s wise to have a little extra moolah on hand to weather the storm and prevent yourself from being liquidated – if you have too little collateral the exchange won’t allow you to keep the trade open.

Margin call sign

A little backup funding can go a long way in easing your mind.

Be cautious of news and developments

Crypto trading is volatile enough as it is, but combined with the occasional “FUD” news, things can go from bad to worse in no time at all – and if you’re trading on margin this can spell the end of your entire position rather than just being a temporary setback if you were holding these assets in the traditional fashion. China banning crypto exchanges and ICOs last September is just one of many news headlines that led to a sharp drop over the course of a few days (-25%~ between the 14th-15th September 2017), and there will undoubtedly be more in the future; regulatory body and governmental statements on cryptocurrency thus far appear to be the most influential on price action. Being wary of these developments is an important tool to have in your arsenal.

Market volatility chart

Another vital tool when trading on margin is a so-called stop-loss. It is essentially an automatic sell order that you can set to trigger at any price point you desire, with the intention of mitigating or “stopping loss”. In the case of unexpected movement against your position, stop losses have got your back.

Stick to your gameplan

Getting carried away in the heat of the moment is easy to do, but as TV shows Billions taught us:

“An average trader makes a trade and feels good, a great trader makes a trade and feels nothing.”

That’s not to say you shouldn’t feel good about your successful trades! But the mindset of a pro trader is better off being cold and distanced from their trades, as involving emotions too much and ignoring your targets can be a recipe for disaster.

Remind yourself of why you set these targets, and stick to them. Entry price, target price, and stop-losses are all there for a reason, so know why you chose these numbers, and don’t budge once your trade is initiated. If the trade goes ridiculously well and flies past your target, you can always set a stop-loss at your initial target price and allow the trade to ride itself out (and keep moving your stop loss up to lock in more profit), but remember that things can turn around against as fast as they shot up. The same goes for negative trades – no trader is flawless, and knowing when to exit the trade with a small loss is as valuable as knowing when to take your profits.

Know the interest rate of the coin you are trading

As you are borrowing money from a third party to margin trade, you will also have to pay an interest on the coins you are borrowing once you close your trade. While interest rates shouldn’t bother you if you’re completing good trades, they can nonetheless add up over time, especially if you’re borrowing large sums – so knowing the interest rates of coins before you start trading shouldn’t be skipped.

Huobi, for instance, offers a fairly low interest rate of 0.1% on USDT and 0.02% on BCC, ETH, LTC, ETC, DASH, XRP, EOS, OMG, and ZEC.

Buy in over time – not all at once

It can be tempting to feel like the universe is on your side and risk all of your funds at once – surely the payday will be worth it? Maybe – but if the market moves against you, you risk being margin called or losing a large chunk of your funds all at once.

Margin trading is about maximising potential profits just as much as it is about risk management. So instead of going all-out, allocate a certain % of your funds to a given trade, as trading on margin will give you a larger amount to trade with in any case. If you trade with just 5% of your total funds (in your case the percentage may be higher or lower), a trade going against you may be painful, but still won’t break you.

When it comes to lower risk trading (either on lower margin or none), dollar-cost-averaging is also recommended. This is the act of buying coins in increments instead of buying the total amount you wanted all at once. This is due to market fluctuations giving you the opportunity to average your buys in and end up with a lower average cost than if you had gone all in at a specific price. Even if the price trend is upwards, you will still have a lower overall average.

Margin trading can be a valuable tool to you, but if you don’t practise good risk management, keep an eye on the market, and have somewhat of a safety net, it can quickly become a tool for the better-versed to lighten you of your monetary load. Trade carefully out there and good luck!

Remember that you can margin trade on Huobi Global – sign up here.

Disclaimer: This is a sponsored post.