What is Margin Trading?
The method of having assets traded using the funds that a third party provides is margin trading. Compared to regular accounts in trading, margin accounts let traders have access to large amounts of capital that allows them to make their positions leveraged. Margin trading essentially amplifies the results of the trading for traders to be able to realize significant profits on any successful trade. Having this ability to expand the trading results can make margin trading highly preferred in markets of low-volatility, especially in the international ForEx market. However, margin trading is also what people use in cryptocurrency, stock, and commodity markets. When it comes to the traditional markets, the funds borrowed often come from an investment broker. However, in cryptocurrency trading, the funds are given by other traders who earn interest that has a basis on the market demand for these margin funds. Despite being less common, there are cryptocurrency exchanges that also give their users’ margin funds.
Margin Trading: How does it work?
Every time a margin trade gets initiated, the trader would have to commit a specific percentage of the order value in total. Also known as the margin, this initial investment is closely related to the leverage concept. Margin accounts in trading are what people use to leverage trading, with leverage describing the ration of funds borrowed to the margin. As an example of this, if a trader wants to open a trade of $100,000 with 10:1 as leverage, that person would have to commit $10,000 of their available capital.
Naturally, there are distinct sets of leverage rates and rules that various trading markets and platforms offer. As an example, in the stock market, the typical ratio is 2:1. Futures contracts, on the other hand, often get traded with a leverage of 15:1. When it comes to ForEx brokerages, the margin trades frequently get leveraged at a ratio of 50:1. However, there are some cases wherein 200:1, and 100:1 get used. Whenever cryptocurrency is involved, the ratios typically range from 100:1 to 2:1, with the trading community often using the terminology ‘X’ in 50x, 10x, 5x, 2x, and others.
People can use margin trading to have both short and long positions opened. A long position can reflect the assumption that the asset’s price will increase. The short position is a reflection of the opposite. Even if the margin position becomes open, the trader’s assets will act as collateral for funds borrowed. It can be critical for any trader to understand this because most brokerages have the right to force selling these assets whenever the market moves below or above a specific threshold against their position.
For example, whenever a trader has a long leveraged position opened, the margin call can happen whenever there is a considerable drop in the price. The margin call occurs whenever a trader has to deposit more funds into their margin account to get to the minimum requirements in margin trading. In case the trader fails to do this, their holdings could automatically get liquidated so they can cover their losses. It typically happens whenever the liquidation margin or the total value of all of the margin account’s equities falls below the particular broker or exchange’s complete requirements in the margin.
Pros and Cons
Margin trading is most obviously advantageous because it can lead to more significant profits because of the trading positions and their more excellent relative value. Aside from that, it can help to undergo margin trading for diversification as it lets traders open some positions with investment capital in minimal amounts. Lastly, once you have a margin account, it can be easier for any trader to immediately open positions without the need to have large amounts of money shifted to their accounts.
Despite all of these upsides, margin trading still has the apparent disadvantage of increased losses as it can do it, similar to how it can improve your gains. It is not like regular spot trading because margin trading introduces a loss possibility that can exceed the trader’s initial investment, which can be a high-risk trading method. It can depend on the trade’s involved leverage amount, as a slight drop in the market price can make traders experience substantial losses. Thus, investors need to employ the proper risk management strategies whenever they undergo margin trading by using tools in risk mitigation like stop-limit orders.
Cryptocurrency Markets and Margin Trading
Inherently, margin trading can be so much riskier compared to regular trading. However, whenever cryptocurrencies are involved, the risk can be so much higher. Since these markets have high volatility levels, margin traders in cryptocurrency need to be very careful. Even if risk management and hedging strategies could be handy, it is not suitable for beginners to get into margin trading.
The risks involved with margin trading won’t get eliminated even if you determine the exit and entry points, identify trends, and analyze charts. However, it would help if you become more effective in trading and better anticipate the risks. Before you can leverage on cryptocurrency trades, we highly recommend users initially develop a great understanding of technical analysis so they can get extensive experience in spot trading.
Investors who can’t tolerate the risk to become involved in margin trading can also profit from methods in leveraged trading. Some cryptocurrency exchanges and trading platforms have the feature known as margin funding. Here, users are allowed to commit their money to fund the other users’ margin trades.
Often, the process follows specific terms and yields interest rates that are highly dynamic. Whenever a trader accepts the offer’s takes and terms, the funds’ provider will become entitled to the loan repayment with interest that they agreed upon with each other. Even if the mechanisms may differ from one exchange to another, the risks in providing margin funds can be relatively low because they can forcibly liquidate leveraged positions to avoid any excessive loss. Yet, users would still have to keep their funds in the wallet exchange in margin funding. Thus, it is vital to have the involved risks considered and to understand the way the feature works on their chosen exchange.
How can you open a Binance Margin Trading account?
Once you log into your Binance account, have your mouse move to the top right corner and let it hover over your profile icon. It will show the first two characters of your email address. Once the dropdown opens, click on your email so you can go to your account dashboard.
In case you’re unaware of margin trading, we recommend that you finish reading this article first before opening a margin trading account on Binance.
Once you get to your account dashboard, you can check out this page for your account balances. Under “Balance Details”, click on “Margin” so you can start opening a Binance margin trading account. You need to complete the KYC identity verification and ensure that your country is not part of the blacklist. Enabling 2FA is also mandatory.
After that, you will see a reminder regarding margin trading’s risks. Make sure that you read it first. In case you are still willing to push through with it, click the button that says “Open margin account.”
Make sure to allow enough time to carefully reading about the margin account. Once you feel that you understand and agree to the Terms and Conditions, tick on the box and click on “I understand.”
Ways you can transfer funds.
Once your margin account gets activated, you can have your funds transferred from your regular Binance Wallet to your Margin Trading Wallet. Do this by clicking on the “Wallet” tab, choosing “Margin, and clicking on the button “Transfer” that you can see on the right side of the page.
After that, choose the coin that you want to transfer. It can be BNB.
Encode the amount that you desire to transfer from your Exchange Wallet to your Margin Wallet. Click on “Confirm transfer” after that.
Ways to borrow funds
Once you have BNB coins transferred to your Margin Wallet, you can have these coins used as collateral so you can borrow funds. Your Margin Wallet’s balance will determine the funds you can borrow following a fixed rate of 5:1 (5x). Once you have 1 BTC, it can be possible for you to borrow four more.
After choosing the coin that you want to borrow, including the amount, click on “Confirm borrow.”
After that, your margin account will get credited with your borrowed Bitcoin. You can then trade the funds you borrowed while you have a 0.02 BTC debt, including the interest rate. The interest rate gets updated hourly. Check out the pairs that are currently available, including their rates on the Binance Margin Fee page.
Review your current margin account status by going to the page “Wallet Balance” and choosing the tab “Margin.”
The Margin Level
You can see your margin level on the screen’s right side that provides your risk level according to your Account Equity or funds that you hold as collateral to your margin account and Total Debt or borrowed funds.
The risk level could change based on market movements. Whenever the prices don’t move according to your prediction, you can have them liquidated. In case you get liquidated, you can get charged with additional fees.
The formula for the calculation of the margin level:
Margin Level = Total Asset Value / (Total Accrued Interest + Total Borrowed)
Whenever you have a margin level that goes down to 1.3, you will get a Margin Call that would remind you to either reduce your loan (through repaying what you borrowed) or increase your collateral (through depositing additional funds). Whenever your margin level goes down to 1.1, your assets will automatically get liquidated. Binance will have your funds sold at market price for the repayment of the loan.
If you want to have detail information on your existing positions, click on “Positions.” In case you want to see the USDT values, choose “USDT Benchmark” found on the right side.
Ways you can trade on margin.
Whenever you want to trade using your borrowed funds, check out the Exchange page, choose the tab “Margin,” and usually trade using Market, Stop-Limit, OCO, and Limit orders.
Ways you can have your debt repaid.
If you want to have your debt repaid, choose the button “Borrow/Repay” and click on the tab “Repay.”
The total amount that would get paid is the sum of the borrowed total, including the interest rates. Just make sure to proceed once you have the balance required.
Once you become ready, choose the amount and coin you want to repay, and select “Confirm repayment.” Take note that to make the repayment, you can only use the same cryptocurrency.
The switch button
You may notice that there is a switch button on the margin interface that is next to your balances. This button can switch between margin mode (margin orders) and asset mode (normal orders).
As an example, if your Margin account has 5 BNB, you can have a total of 15 BNB sold.
Take note that you now have the button “Margin Sell BNB” instead of the regular “Sell BNB.”
Whenever you choose to “Margin Sell” 7 BNB, the system automatically has 2BNB borrowed for you (remember that you have 5 BNB as your actual balance.)
Once you click on “Margin Sell BNB,” you will get a message of confirmation.
The Switch button can allow you to borrow funds whenever new positions get opened immediately. Yet, you would have to repay borrowed funds after that manually.
Moving back the funds
Whenever you want to have your funds moved back from your Margin Wallet to your regular wallet in Binance, choose “Transfer” and click the button found in between the two wallets so you can change the transfer’s direction. After that, select the amount, and the coin, then click on “Confirm transfer.”
You can have funds moved freely from a wallet to another without paying any fees. However, you need to note that in case you have borrowed assets, there will be an increase in your risk level because of the decrease in your Margin Wallet. Whenever your Risk Level becomes too high, it increases the chances of having your assets liquidated. Because of that, it is vital to have an understanding of how margin trading works before you use it.
Since Bonnie believes that the price of BNB will increase, she wants a leveraged long position on BNB opened. To do this, she initially transferred funds to her Margin Wallet and borrows BTC. After that, Bonnie uses the BTC she borrowed to purchase BNB.
Whenever the BNB’s price increases as Bonnie expected, she can have her assets sold to repay the BTC she borrowed, including the related interest. Her profit will come from the leftover of the trade.
Yet, margin trading could amplify both losses and gains. Whenever the market ends up moving against Bonnie’s position, her losses can be so much more significant.
Margin trading can be a helpful tool for anyone who wants to increase every successful trade’s profit. Whenever it gets appropriately used, margin accounts provide leveraged trading to diversify your portfolio and increase profitability.
Yet, like what we mentioned before, this kind of trading has higher risks that could amplify your losses. Because of that, it would be best to become highly skilled before getting into margin trading. In cryptocurrency, it would be better to approach margin trading more carefully because of the market volatility’s heightened levels.
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Learn more about Futures Trading with Binance now.
Check out our Guide to Margins Trading to learn more!