Leverage trading is a technique that involves borrowing or ‘leveraging’ value from your broker. This increases your trading power and makes trades in values much higher than your current funds. It basically means borrowing some funds to create a trading position which you would otherwise not be able to do. Leverage trading increases profit potential, as you are trading in figures much higher than what you own. However, doing so also increases your risks and makes you an easy target for liquidation.
Let us give you an example of how leveraged trading actually works. For instance, say you have 3 BTC in your account but want to open a position worth 30 BTC. It is absolutely impossible to do that with the limited funds in your account. However, you can use a leverage ratio of 10:1 to create this position. This gives you the chance to earn 10 times the profit or suffer 10 times the loss depending on how the trade goes.
Traders are drawn towards leverage trading as it gives them the potential to increase their returns significantly. However, it is important to note that crypto trading is an uncertain and volatile market. Traders have to be adaptive and reactive to the many changes in the market. Even past strategies which have yielded good results are unreliable to repeat. In other words, leverage trading is NOT for excited beginners.
How Does Leverage Trading Actually Work?
Leverage trading, or margin trading, is a simple mechanism that allows users to borrow money to create higher positions. As a trader looking to conduct leverage trading successfully, you will need two things; initial and maintenance margins. The initial margin is the amount of BTC you must invest in creating a position. Meanwhile, the maintenance margin is the amount of BTC needed to hold and maintain your opening.
You can either go for the long haul when leverage trading or try to short it. Going long means buying an item or contract and selling it off once the price increases. Shorting is the opposite of going long and involves buying items that are decreasing in value. This way, you can buy back the same item once the price has decreased significantly.
Opening a position via leverage trading means you have put down a certain amount as collateral. This serves as a deposit when it comes to making trades. Another important factor in leverage trading is the liquidation price regarding losses. This refers to the exact price at which your collateral amount is liquidated and at which point you have just made someone else money and generously “donated” a good amount of money to the BitMEX insurance fund.
Using higher leverage reduces the amount required for the initial margin. However, doing so will also bring your liquidation point that much closer, making the trade riskier. This is because the liquidation point depends on the amount of leverage.
To explain, if you use 25x leverage, liquidation will be triggered if the market price moves against you by 4%. However, if you use only 5x leverage, your position will only be liquidated if the market price moves 20% against you.
What is BitMEX Leverage?
The BitMEX platform offers significant leverage up to 100 times in two different types. The first type of leverage provided here is isolated leverage and is comparatively the simpler one. Isolated leverage basically means using a preset for the leverage, which calculates the margin amount. The advantage here is that we only lose the margin amount in case the position is liquidated.
So while opening a position with isolated leverage, you will have to choose the leverage between 1x to 100x. So, for example, let’s say you open a 20BTC position using 10x leverage. Say your initial margin to open the position costs 1.9 BTC. This means that you will only lose 1.9 BTC in case of liquidation.
As you can understand, this type of leverage comes at low risks and is attractive for beginners. Isolation leverage is the choice for you if you’re looking for something basic. It is perfect to use in situations when the position is large, and you can afford to lose the liquidation price.
However, if you want to raise the stakes, you could always go for cross leverage. This type of leverage is more complicated than the latter and comes with huge risks.
Using cross leverage requires putting your entire account as margin, meaning you are left with nothing if it doesn’t work out. That’s why it’s wise to set a stop-loss order in case things go south. This is different from a liquidation price, as it is designed to prevent liquidation. We imagine you’ll be issuing a lot of limit orders as well. You should always set these parameters to protect your investment as a trader.
How To Successfully Place A Trade On BitMEX
You can successfully conduct trade on BitMEX using the following steps.
- Log in to BitMEX or register with BitMEX (remember to apply a BitMEX referral code if signing up now, as you will be able to save 10% on your trading fees, which will quickly add up).
- Deposit funds into your BitMEX account by selecting the wallet option.
- Select the trade option on top of the screen and choose the crypto you want to use.
- Select the type of order you want to place from the order box on the left of the screen. Enter the amount you want to buy or sell.
- Set your desired leverage using the slider below the order box.
- Choose whether you are buying or selling, and then confirm your order.
How To Use BitMEX Leverage
Knowing about leverage is one thing, but knowing how to use it the right way is another. When using BitMEX leverage, you should always be aware of the risk factor. You see, what’s important isn’t how much leverage you use on a position. It’s all about how much risk your wallet takes because of this position.
Most beginners think that increasing the leverage increases the potential for higher returns. Unfortunately, that is not the case at all. The only thing that increases returns is the size of your position. Leverage only changes the margin needed to open a position, not the size of returns. To put things simply, make sure you can afford the collateral damage.
One way to make money on BitMEX without risking your funds is to promote the platform through the BitMEX affiliate program.
BitMEX Leverage Trading FAQs
All potential profits from your open positions will be displayed in the open positions tab. For a more in-depth explanation, refer to the profit and loss guide for BitMEX.
Since BitMEX is banned in the US, you can only access it using a VPN.
You will lose all your margin and unrealized P&L if you use cross leverage.