When looking to maximize their return on investments, many professional traders turn to leveraged trading (also called margin trading). Let’s dive into what this type of trading is and what advantages it has to offer.
Put simply, leveraged trading is a way for traders to take a position using more capital than they are actually putting in. This allows traders with small holdings to trade much larger amounts. When using this type of trading through an exchange, a “leveraged” amount of capital will be “loaned” to the trader via the exchange in order to multiply the potential outcome of the trade. This leverage is typically seen written as ratios such as 3:1 or multiples using “x” such as 3x leverage.
For example, if you felt confident in the current upward trend of Bitcoin, you could
trade with a much larger holding than you would otherwise be able to by leveraging your position. If you entered a trade with $100 at 10x leverage, you are now holding a position of $1000 in Bitcoin. If BTC rises by only 1% and you sell, you have now made $10 profit. So, you made 10% on your investment, despite BTC only rising by 1%. Not too bad!
Of course, there is always extreme risk with results this drastic. When you leverage a large position and the price reacts the opposite of what you expected, the results are multiplied fast and your initial investment can be quickly wiped out.
Due to this, always make sure you don’t invest too much into risky moves, and educate yourself on chart analysis to make the most informed decisions (read more about technical analysis on our TA blog post). Be sure to check out our leveraged trading options including our high leverage tap trading.