How does leverage in crypto trading work?

Financial leverage is the amount of money that the cryptocurrency broker lends to the trader to execute transactions (buy or sell cryptocurrency derivatives). This allows you to open a larger position on the account with a smaller amount. But how does it work?

Let’s say your account balance is $ 100. You analyze the market and decide to open a long position on a crypto contract. If the crypto contract costs $ 100, you can buy a contract for your money. If the price of the contract increases by $ 1, you will make a profit of $ 1. If you want a bigger profit, open a position with 10x leverage. That means you have $ 1,000 available and can use it to buy 10 contracts. If the price of the contract rises, you earn 10 times more profit than without leverage.

The same goes for short selling as the process is the same.

Caution: Gearing works both ways

This leverage can be very good for you or very bad. In the example above, every $ 1 change in the contract price results in a $ 10 change in your account balance because you purchased 10 contracts. When the trade goes well, the investor earns ten times more profit compared to just one contract. But if you make losses, the loss also doubles tenfold. Gearing trading increases your profit but also your losses and can therefore also cause great harm. You can think of leverage as a trading booster: you earn more on a profitable trade. In the opposite development, your loss will also increase correspondingly.

Gearing Trading: What is there to Consider?

So trading leverage requires a balanced and orderly approach. You should trade carefully considering how traders could go both ways. Here are some recommendations that can help you use leverage wisely and control the risks.

  • Use a proven, efficient trading system. Trade is about strategy. Without a well-run, efficient trading system, one can hardly hope for a profitable trade. You should always act according to strict rules and always adhere to them.

  • Always use stop loss orders. The stop loss is an order that the investor gives to the broker to automatically close a position if the price moves in the opposite direction. Stop losses help limit losses by closing positions at a predetermined price level.

  • When trading, only take risks that you are familiar with. The level of risk plays a crucial role. Imagine risking 2 cents of your total capital on a single trade. This means that if you make 5 losing trades in a row, your capital falls to 90 percent of the amount originally invested. To get the previous amount back, you must earn 1/9 of your capital, which is 11 percent. However, if you choose 0.5 percent as a risk on a trade, your equity will only decrease by 2.5 percent on five consecutive losing trades. To break-even, you only need to earn 2.5 percent of your capital, which is much more likely. So lower risk leads to lower losses on the traders. Psychologically, it is more acceptable.

Leverage is a powerful tool for multiplying your profits. However, this should be used with caution so that you do not slip into the minus through several losing trades.

Today, many crypto platforms offer geared trading, including Binance, OKEx, BitMEX and others. One of the most popular and reliable crypto exchanges for trading leverage is CoinEx. Founded in 2017, it is currently one of the largest and most trusted exchanges in the crypto industry. The easy-to-use charting tools and low trading fees make it a must-have for both beginners and experienced traders.

CoinEx offers dozens of trading instruments, including cryptocurrencies and spot market currencies, with 10x to 50x leverage and low commission fees. In the charts you will find several graphical tools that you can use to build your strategies and test different tactics.

Learn more about CoinEx

Disclaimer. Cointelegraph does not endorse any content or products on this site. While we would like to provide you with all the important information we can get, readers should do their own research before acting. They bear full responsibility for their decisions. This article does not constitute investment advice.

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