Leverage Trading : It's Meaning And Concepts In The Cryptoecosystem

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Hi friends,

I am @ruthjoe, a moderator of steem4nigeria and it is an honor to come before this community again today.

Today, I am happy to come to this great community to share my understanding on leverage trading in the cryptospace, please tag along with me as I share my knowledge on leverage trading.

WHAT IS LEVERAGE TRADING

Leverage trading which we can also call margin trading can be explained to be a kind of financial strategy that has to do with the borrowing of funds to multiply the size of your position higher than what your capital can originally allow.

In other words, we can say that leverage trading gives traders the opportunity to use a smaller capital amount to handle a larger position size in the market

Leverage can also be said to be a ratio, Indicating the proportion of borrowed funds to the original capital of the trader.

The original aim of leverage trading in the cryptospace is to amplify potential profit.

Traders make use of leverage to magnify their exposure to price movement in the cryptomarket, with the hope and expectations that the borrowing cost will be lower than the amplified gains.

As we strive to gain more knowledge on leverage, join me as we understand it's key concept.

KEY CONCEPTS OF LEVERAGE TRADING

There are key concepts that explains the operation of leverage trading and we will be discussing some of them.

• Leverage Ratio

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The leverage ratio in leverage trading serve as a representation of the proportion of borrowed funds to the capital of the trader.

For example, if a trader is given a leverage of 1:10, this implies that the trader has the ability to control a position that is 10x his original capital.

Some other leverage ratio include 2:1, 6:1, 10:1 and even weigh higher, depending on the term of the broker and the financial instrument.

• Margin

Margin in leverage trading is known to be the collateral that should be deposited by a trader to a broker inorder for a particular position size to be opened.

It helps to function as a protection against significant losses.

The margin requirement is often calculated in percentage and expressed as a percentage of a trader's total position size.

And if the market in leverage trading moves in the opposite direction as that needed by the trader, the margin can quickly be depleted by the losses which will result to a margin call.

• Margin Call

A margin call in leverage trading can be known to be an emergency call or a security call that occurs when the losses on the leverage position approaches the margin deposit of the trader.

In scenerios such as this, the broker most oftentimes request additional funds to close out the position or to cover position losses, which will help limit further losses.

Margin calls are known to be inherent risk in crypto trading and it helps to place emphasis on risk and risk management in leverage trading.

• Long And Short Positions

With the use of leverage positions, traders can take both short(sell) and long (buy) positions in the market.

When taking a short position in the market, the trader expect to see a fall in market price, and when taking a long position, an increase in market price is expected to be seen by the trader.

And with leverage, traders are allowed to profit from price movement in either direction.

• Risk And Reward

Just as leverage magnifies risks and losses, it also magnifies profits

A small movement in price can result to a significant loss on a trader's portfolio, especially when he makes use of a high leverage.

A successful trading of the market using amplified positions require proper knowledge and understanding of the market, risk management and also technical analysis.

• Funding Cost

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Funding Cost is another Important concept of leverage trading.

When a trader attempts to borrow more capital for trading, he incures what we know to be funding cost.

This incured cost can be accumulated over time and this can affect the overall profitability of the trade.

It is very important that traders gain awareness of the financing rates that is involved with a leverage position.

Conclusion

In conclusion, we can say that leverage trading is a double edge sword that offers both am amplified risk and and amplified profit.

It should be approached cautiously by traders, and they should gain a thorough understanding of it's mechanism.

It is also very important for traders to make good use of risk management in leverage trading.