The Ultimate Guide to Leverage Trading in 4 Steps

To start things off on our ultimate guide to Leverage Trading, let’s look at just what Leverage Trading actually is. Since the birth of the Cryptocurrency sphere in 2009, it has adopted countless niches, technology, and trading methods. Leverage trading, otherwise known as margin trading, is one of them. But what exactly is it?

Leverage trading is a fairly intense form of trading where you take additional risk in exchange for the possibility of an extra reward. When a trader feels like the odds are in their favour, they borrow money to increase the bet as they trade. Put simply, leverage trading allows you to trade crypto with more money than you actually have in your account.

This form of trading is always done through a broker that provides leverage trading services. After opening a margin account, a leveraged trader will then borrow money offered by the exchange itself or a peer-to-peer loan option. The money in your margin account is then used as collateral for said loan.

The general symbols used in leverage trading are either with an  ”X” next to the leverage or in ratios. For example, the symbol representing seven times leverage would be 7x or 7:1. To create a better understanding of this form of trading, let’s look at a leverage trading case study.

A Crypto Leverage Trading Case Study

To create a better understanding of this trading method, let’s look at a crypto leverage trading case study. Let’s say that a trader has 1,000 Euro he or she wants to use to create a leveraged long position on Ethereum as they strongly believe that the price of Ethereum will significantly increase very soon.

The broker that the trader is using, let’s say eToro for example, offers up to 50x leveraging on Ethereum at a full ratio of 1:50. The broker will hold onto the trader’s initial 1,000 Euro. Normally, the trader would create a long position worth 1,000 Euro. But in leverage trading, they have now created a position that is a long of 50,000 Euro on Ethereum.

Now, let’s say that the price of Ethereum suddenly rises by 10%. In regular trading, said trader would have made 1,000 Euro x 10% which is a 100 Euro profit. Not bad, right? Well, in leverage trading the profit would be 1,000 Euro x 10% x 100%. From just one single trade, that’s a 10,000 Euro profit on a 1,000 margin on just a 10% increase on the price of Ethereum!

Leverage Trading can be considered as one of the most powerful tools traders can use in order to increase returns on their investments. Whilst this type of trading can see you make dramatic returns, it can also have a catastrophic effect on your personal finances if it’s not done correctly. To quote the iconic Warren Buffett:

 “When you combine ignorance and leverage, you get some pretty interesting results.”

– Warren Buffet

Whilst leverage trading has absolutely incredible potential, there are of course disadvantages where there are advantages. Let’s delve into three of each when it comes to this aggressive form of trading in order to give you a clearer picture.

Advantages:

1. Since you only have to put a fraction of the value of the assets you are trading, Leverage trading has the ability to free up your capital.
2. When it comes to trading the crypto itself, you can take much bigger positions than you could with conventional trading. This means you can get the most out of your capital, and also gives you the ability to invest in a number of different cryptocurrencies rather than restricting yourself to one or two.
3. Leverage trading can also open up new trading opportunities that would otherwise be unavailable. For example, during periods of little action or stagnation, you may be put off investing due to the low returns. With leverage trading, the returns would be multiplied thus potentially opening new opportunities.
4. Last but not least is the most obvious advantage of leverage trading. This trading method can multiply your profits to enormous levels if done correctly.

Disadvantages:

1. In comparison to conventional trading, leverage trading takes away the beneficial aspects of ownership and delivery.
2. In the event that the market turns against you, you may be forced to deposit an even bigger margin to cover your losses.
3. When you take into account borrow fees and margin rate, leverage trading can have some fairly high fees. However, if it’s a good trade then fees shouldn’t stop you from executing it. But the key is to ensure it’s a good one, as the fees can easily negate profits or turn a winning trade into a losing one if you’re not careful.
4. And last but certainly not least when it comes to disadvantages, whilst your gains can be multiplied, so can your losses. If the market goes against you, you could see your losses multiplied which can be disastrous for your finances if you’re not careful.

With such an aggressive trading strategy, it would be foolish to dive into it without first taking on board some trading advice. This section of our ultimate guide to Leverage Trading delves into seven pieces of critical advice that you should consider before attempting leverage trading.

1. Create a Trading Plan

Before you start leverage trading, you should create a trading plan. The plan should be thorough and well researched, Assess your market knowledge, outline your motivation, define your goals, and choose a risk-reward ratio. Always stick to the plan and build a solid case for each and every leverage trade you make.

2. Understand Your Risk

Even in conventional trading, a solid trading plan needs to have a defined goal and a defined risk. But this is even more critical when it comes to leverage trading.

When it comes to making a leveraged trade, you’re not trading smart if you don’t have a clear vision of the potential risk. If you try to ‘’wing it’’ so to speak, you might get lucky on or a few trades, but eventually, you’ll lose.

3. Have a Set Amount That You’re Willing to Lose

Understanding risk is a lot more simple when you consider the amount of money you’re putting into the trade. For example, you plan to risk 100 Euro in order to reach your goal of 200 Euro profit, this all needs to be factored into your trading plan. Treating risk in terms of your actual hard-earned money will help you visualize and understand it. Rather than treating it as a virtual game, which it certainly isn’t.

4. Understand the Fees and Commissions Fully

We mentioned fees and commissions associated with leverage trading easier. The fees associated with this type of trading are more complicated than usual. After a while, they can add up to a hefty amount and negate your profits. So always plan ahead and account for them to avoid unforeseen additional costs.

5. Stop Loss is Your Friend!

All respectable leverage trading platforms will have a stop loss tool. This is designed to close a trade at a certain amount if the market moves in a direction you do not want it to go. The Stop Loss tool is exceptionally useful and helps you make sure you know how much money you risk losing in a leveraged trade.

6. The Take Profit Tool is Also Your Friend

A Take Profit tool essentially works the opposite way as a Stop Loss tool. Basically, you set a Take Profit order at a specific amount to close your position and take your profits when it suits you. Cryptocurrency is a very volatile sphere, so cashing out before it turns in another direction can be a very wise idea.

7. Never Risk More Money Than You Can Afford to Lose

Last but not least, we round off this section with a solid piece of investment advice that should be considered for both conventional and leverage trading: Never risk more money than you can afford to lose. Even if you’ve seen a number of successful trades, don’t get cocky as cryptocurrency can change rapidly. A good rule of thumb is never to risk more than you can afford to pay off if your trade goes bad.

A good leverage trading platform will be well-established, trustworthy, and with enough systems in place to keep investors safe from significant losses where possible. We’ve tried a lot of different trading platforms, but the number one leverage trading platform for us is eToro.

eToro boasts a number of advantages. It is also home to vital leverage trading resources such as the Stop Loss and the Take Profit tools that can assist you in trading more safely. The platform also has a negative balance protection tool. In the event that market conditions lead to a loss on your investment and cause your equity to go into the negative, you are given the option to absorb the loss and reset your equity to zero. 

A Conclusion to Leverage Trading

As we come to an end of our ultimate guide to leverage trading, let’s draw a conclusion. Whilst margin trading crypto can seem overwhelming at first, it can be a profitable trading technique provided you do your research, trade carefully, and take a hands-on approach. Most importantly, it’s good to remember not to get carried away or get cocky after making a few good trades. Keep a level head and continue to trade smart.

It’s also important to remember not to invest more than you can afford to lose. By using a trusted leverage trading platform like eToro, you can take advantage of their range of resources such as the Stop Loss and Take Profit tools. Start off slow and As time goes by, you will hopefully gain experience and skills to delve further into leverage trading and increase your profits.

We hope this guide to leverage trading has provided you with a better understanding of this trading strategy and trading techniques to be more successful. For more awesome guides to the fast-moving world of cryptocurrencies, check out our buy, sell, and trade guides covering everything you need to know!

Disclaimer – This content is for informational purposes only and is not investment advice. The trading of Bitcoins, alternative cryptocurrencies has potential rewards, and it also has potential risks involved. Trading may not be suitable for all people. Anyone wishing to invest should seek his or her own independent financial or professional advice