Bitcoin Leverage Trading in India
Leverage is often encountered by beginner traders who do not yet have significant capital of their own but who want to trade cryptocurrencies, options or futures on the exchange. What is leverage or margin trading? What are the benefits? Is it always beneficial? When can it be detrimental? What mistakes should be avoided when using leverage? In this article, we will try to answer these questions and learn about Bitcoin leverage trading in India.
Leverage - what it is in simple terms
Leverage is a brokerage service, a loan of money or securities provided to a trader for making a deal. The loan amount may exceed the trader's deposit by 10, 20, 100 or more times. By analogy with the law of physics, leverage, as a lever, allows the trader to make deals that he would not be able to make with his funds only.
Transactions at the exchange using leverage are called margin trading. It is the conclusion of purchase and sale transactions using borrowed funds issued against the pledge of a certain amount, which is called a margin.
In other words, to use the service of leverage, you need to have a minimum amount on your deposit (set by the broker, in this case, Bitcoin trading platform with leverage ), which will be a pledge.
Leverage size is the ratio of the trader's funds to the loan amount (1:100, 1:1000). For example, if this ratio is 1:500, the broker is lending the sum 500 times the investor's deposit.
The word "leverage" scares many people, but actually, there is nothing wrong with this concept. Leverage is not a loan in the usual sense of the word. No interest is charged for its use. The funds are not deposited into the trader's account. They go directly to the deal. If a trade is losing, the trade is closed when the trader's funds decrease to a specific critical figure (20-30%, and sometimes 50% of the original amount, depending on the broker's conditions).
When a trade is rolled over to the next day, the account is charged a fee equal to the interest rate difference between the credit and the deposit - a so-called swap, which can be considered analogous to a fee for using leverage.
Let's use a simple example to see how Bitcoin trading with leverage works.
Let's assume a trader has $100 on his account, the value of the loan is 1:100, and the transaction amount is $10,100.
If the trade is losing, it is forcibly closed when the trader's funds are reduced to $20. There is $10,020 remaining in the transaction account. The borrowed $10,000 goes back to the brokerage account. The trader's loss is $80.
If the trade took place and the profit was $900, then the account for the trade will be $11,000. Of this, $10,000 goes to the broker's account, and the trader gets back his $100 and a $900 profit.
Risks of Bitcoin trading with leverage
As a trader, it is essential to understand your risks and potential opportunities. Experienced traders employ various risk management strategies and are also aware of events that can lead to increased risk, such as news releases and critical economic data, geopolitical tensions, or regulatory updates.
Let's not forget that there are two sides to every coin. The same can be said about trading with leverage. While leverage can help you make big profits, it can also increase your losses. Let's go back to the example we discussed above, where you opened a Bitcoin cryptocurrency trading position with 100:1 leverage. In this case, you invest $100 and open a $10,000 trade to anticipate a rise in the cryptocurrency's value.
Let's say that the market does not live up to your expectations and starts moving in the opposite direction, and the rate drops by 100 pips. In this case, you would incur a loss of $100.
You could potentially lose even more than the amount in your trading account. If your losses exceed your trading account balance, your broker may send you a 'margin call' and ask you to deposit more funds in your account. Because of trading losses, your account balance can even become negative if your broker does not protect against negative balance.
In such a situation, your broker may either require a specific amount to cover your losses or ask you to close out some of your open positions. If you cannot meet your broker's margin call requirements, the broker will close all your positions.
Be sure to consider all risks to safeguard your funds and increase your profit chances.
The Bitcoin leverage trading platform can offer high leverage, but you will need to choose a leverage level that suits you when opening a particular trade. Your choice will depend on your financial goals and your risk appetite. If you are not fully conversant with the principles of leveraged trading and the associated benefits and pitfalls, you may not make the profit you want, or you could end up taking too much risk.
How to use leverage correctly
Leverage is a financial instrument, which allows you to make large deals and earn good profits even on small deposits, if you use it wisely. In order to use this tool correctly, you should follow some simple recommendations:
- Be guided by your own deposit. Calculate your risk based on the amount you have.
- It is better to use a small amount of borrowed funds, which will not allow you to lose all the money at once.
- With any amount of leverage, never trade with the entire deposit. Ideally, a single transaction should take 1-2% of the deposit.
- Be sure to place stop loss levels, this will help reduce risks.
A stop-loss is an instruction for a broker to automatically sell a stock when the price falls to a certain level. A kind of loss limiter.
How does this work in Bitcoin leverage trading? For example, you buy cryptocurrencies at a certain price, and they start to fall rapidly in value. If you can't afford to lose more than a certain amount, you set a stop-loss at a specific level.
The investor determines in advance the price at which he or she will incur the maximum allowable loss and then communicates this to the broker.
The stop-loss prevents the investor from losing too much money. It is considered to be very dangerous to trade in the market without a stop-loss.
Stop-loss is useful if an investor has no time to sit in front of a trading terminal and watch the price movements all the time. It will also help limit losses in the event of force majeure, such as a power outage or stock market malfunction.
Finally, a stop-loss will save the invested money if an investor misjudges the situation during trading.
How to choose the best leverage for trading?
Choosing the right amount of leverage depends on several parameters. For example, if your goal is to make short-term trades and take small profits, you may choose low leverage to achieve your goal.
However, if your goal is to make longer-term margin trading in India and greater profits, you may require higher leverage.
But please keep in mind that high leverage comes with an increased risk. So if you want to use leverage for your long-term trades, it is wise to opt for lower leverage so that a sudden price movement the "wrong way" does not wipe out your profits.
What is take Profit?
Take Profit literally means "to take profit". While Stop Loss limits the amount of loss, Take Profit limits the amount of Profit. The investor defines the price at which the broker will automatically sell the financial instrument after it has risen.
At first glance, this profit limitation seems strange. But in some situations, taking Profit saves the day. As a stop loss, this order helps if the investor does not have time to monitor the stock's performance, waiting for more upside.
In addition, a take-profit order can protect against technical problems, and misjudging the market situation.
What is Bitcoin leverage trading?
Leverage allows traders to gain greater access to financial instruments with a minimum investment, thus increasing their profit potential. However, at the same time, leverage also increases the potential for losses, so it is important to exercise discipline in risk management when trading with this approach.
It would help if you also kept your emotions under control, as leveraged trading significantly impacts your investment.
Regardless of trading experience, you can use the leverage, do not lose vigilance, calculate the risks, think over the strategy and follow the money-management.
Calculate all the risks based on the size of the deposit, but never on borrowed money. Start with a bit of leverage - so as not to risk all the money at once. Regardless of the leverage size, do not risk the entire deposit in one transaction - it must not exceed 2% of your own funds. And for God's sake, do not forget to put stops! Have faith in your strength and go after your goal. You will be successful for sure!