How Does Margin Trading Work?
Whether you are a beginner trader digging the investment strategy in question or a pro looking to upgrade their trading game, you must have heard about margin trading. Is it just smoke and mirrors or is it a good way to boost your returns? How does margin trading work?
Let’s break it down!
What is Margin Trading?
Margin trading is an investment strategy that focuses on buying and selling different investment types with borrowed money. Yes, that literally means you are going into debt to invest anticipating to make a profit on your investment.
Margin trading is based on leverage. In simple terms, you can use borrowed money to buy more assets that will – potentially – bring you a profit.
Since margin trading implies taking on debt, you have to pay interest on the borrowed funds. The interest rates lie in the range of 4%-10%. However, you may want to know that oftentimes the higher the amount you put down, the lower the rate you will be charged.
In the two of our previous educational articles – What is Margin Trading? A Comprehensive Guide and For Beginners: What is Margin Trading? – we’ve covered the definition of margin trading and leverage in much more detail. Have a read!
What are the Risks?
Any financial activity is a double-edged sword. So is margin trading.
You might make a good profit if you bet on the right horse. But you also might lose more if things go wrong.
How Does Margin Trading Work in Practice?
To start trading on margin, a trader first needs a registered margin account. Make sure you read all the terms and conditions very carefully before you place your first order.
Then, a trader needs to invest a certain percentage of the total order when making a margin trade. The initial funds a trader puts down are called margin. Hence margin in margin trading.
Finally, a trader will choose a leverage. That is, the ratio of the borrowed funds. The leverage limits depend on the exchange you’re trading on margin with. For example, CoinMetro offers 5x leverage.
Trade on Margin with CoinMetro
To margin-trade with CoinMetro, you must complete four easy yet important steps:
- Open an account with CoinMetro;
- Complete your Profile Verification, or KYC;
- Fund your account;
- Allocate some or all of your funds as collateral.
Now, you’re ready to start trading on margin by opening new positions.
Whenever you make a trade, you simultaneously buy one asset and short-sell another. Let’s say, if you buy BTC/EUR, you are buying BTC and shorting EUR. If you sell BTC/EUR, you are shorting BTC and buying EUR.
The amount that you short is automatically borrowed from CoinMetro or other lenders and paid to the trade counterparty(s). The entire process is handled automatically by the CoinMetro trading platform.
As a result, you pay margin fees on the borrowed amount while the trade is still open, but this cost is usually small in comparison to trading profits and losses. When the trade is closed, the borrowed funds are repaid automatically.
For more detailed information on margin trading with CoinMetro, please read our Margin Trading Platform Guidelines.
If you need any help or guidance, the CoinMetro support team is available for you 24/7. Yes, you can talk to an actual – professional and friendly – human being anytime, anywhere. Contact us!