In this article, we will talk about what is margin trading, which is a very common type of trading.
Sure, this instrument has slightly lost its importance and popularity due to the introduction of futures. Nonetheless, margin trading remains popular among regular traders and professional market participants alike.
To begin, let us define what is margin.
Margin is an amount of funds in a trader’s account balance, used as collateral to open a position.
In spot trading, you can buy an asset and hold it for however long. No holding fee is charged. On the other hand, in trading on margin, you borrow assets (e.g., stablecoin or a certain amount of coins) from the exchange. Naturally, the exchange is interested in receiving a fee for the loan. Not that exchanges are greedy or something. They just have to, say, pay interest to those who put their coins in staking. And to be able to pay something, they have to earn something. Now, let us get back on track.
The difference between spot and margin trading is more or less obvious. But what about futures trading? At first glance, they hardly differ at all. In both cases, it is common to trade with leverage in both directions. Except, perhaps, the margin leverage for futures is usually higher. Yet, that is not the main difference. Whichever way you look at them, futures are derivative instruments; even if they affect spot prices, their influence is always indirect.
Meanwhile, in margin trading the influence is as direct as it gets!
For margin traders, there are no separate order books, charts, and volumes. Their orders are in the same book as spot traders’ orders. This means that their stops and takes directly affect the price.
Just as with futures, there are two types of margin in margin accounts:
Leverage is capital borrowed from the exchange in order to open trades for larger amounts and increase the potential profit.
This innovative instrument has to do with margin trading, so we cannot leave it aside.
Leveraged tokens are a type of spot-traded assets that allow you to gain leverage exposure without having to provide collateral and deal with a loan account.
Looking at leveraged token charts in PTT (in the pair tree, they are shown in the ETF/STB group), you could have observed that such assets are often subject to huge pricing anomalies. Nonetheless, you should not think that purchase of a token for 5-10 BTC can cause a U-turn in the price of BTC in all pairs and exchanges.
Did you know that on Binance, the underlying asset for leveraged tokens is a futures pair, rather than a spot pair?
This means that what we can see above is a chart for a derivative, and its underlying asset is another derivative calculated based on a spot price.
For this reason, basing your analysis on leveraged token charts it just as wrong as basing it on futures charts and the volumes shown in them.
Margin trading has its benefits and drawbacks. This type of trading is definitely not advisable for beginners who cannot properly assess their risks. Even though in this case the leverage is smaller compared with that in futures trading, the strong volatile movement against your direction puts you at the risk of losing the entire margin deposit. Thus, any potential loss must be limited with stops.
Always remember the basic rule of margin trading:
Leverage in trading is not used to increase gains; it allows you to decrease the amount of your own funds involved in a trade!
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