“I always define my risk, and I don’t have to worry about it.”
— Tony Saliba
In the previous article, we’ve looked into what margin trading is and what the advantages and disadvantages of this tool are. In continuation of this topic, we’ve prepared ten basic recommendations for margin trading, which are vital to be absorbed before one starts trading. Following the suggestions below will help you save money and reduce losses since margin trading is considered to be very risky, especially when it comes to cryptocurrencies.
1. Only trade what you can afford to lose
Start with money that you’re not worried about losing. The cryptocurrency market is attractive due to its high volatility and the possibility of quick earnings. Spot market lets you earn from short-term price changes and keeps you safer from losing funds, as you do not borrow assets. Margin trading is a much riskier tool as you can get liquidated and quickly lose part of your funds during strong market volatility. Of course, this does not cancel out the fact that you can make significant profits while risking only part of your money. However, it is always worth remembering that you can lose everything you are trading.
2. Start with a small leverage
If you begin trading cryptocurrencies using margin trading, you should start with low leverage. A 3x or 5x leverage would be a good start. If the leverage is higher, then the liquidation price is closer to your entry point as well. When using the 5x leverage, a 20% asset price change in an unexpected direction, will lead to the liquidation. But if the asset goes in the anticipated direction, the same move will double the original amount.
We recommend starting with small leverage and preferably small amounts until you get familiar with this tool in detail, and your margin account starts growing gradually.
3. Do not go all-in on a single trade
You might enjoy a game of poker, but going all-in when trading cryptocurrencies with leverage is a bad idea. You can lose all your funds without the ability to ever return them. Use only some of your money for each trade. This will allow you to hedge your positions and average the losses if trades are not following your plan, yet you believe they will take the expected direction.
4. Always set a stop loss
Stop-loss is the primary risk management tool in margin trading. Setting a stop loss guarantees that you will not be liquidated. If the deal does not go as you originally planned and the stop loss works, you will only lose part of your money.
Suppose Bitcoin is worth $10,000 and you have 10x leverage with a liquidation price of $9,000. If Bitcoin drops to $9,000, you lose the entire allocated amount. But, if you set a stop loss at $9800, you will lose only part of your traded assets. Place your stop loss with caution, if it is too close to your purchase price, you can be stopped before the market has a chance to go in your direction, and if the stop loss is too far, your losses might be more significant.
5. Follow your trading plan
Prepare a trading plan before you start trading and follow it. Cryptocurrencies margin trading requires discipline, and as soon as you begin trading emotionally, you risk losing all your funds. Do not panic while setting a stop loss, even if the position is not following your plan. If you have carefully drawn a trading plan, you should be patient and stick to the plan, because the market can turn around any moment.
6. Always monitor your positions
Margin trading is not the same as passive investing. You cannot afford to invest and ignore market movements for days or weeks to come. An unexpected turn can lead to a significant loss of funds when margin trading is involved. You should be prepared to react if something goes wrong (do not forget about your trading plan!). Carefully monitor your transactions so that you can reduce both losses and risks.
7. Do not buy assets on the rise
If you find that the cryptocurrency you were going to trade is growing rapidly, do not rush to open a position. Due to the lack of liquidity of many assets, market participants have the opportunity to manipulate the rate. This is a simple Pump & Dump scheme. It means that an asset that has risen rapidly can quickly fall to similar levels. Many traders lose their funds due to such manipulations.
Be patient and wait for things to calm down before making a decision.
8. Trading Bitcoin is less complex
It may not be clear why it is important to trade bitcoin rather than other coins. If you do not have much experience in margin trading, it will be easier for you to start with trading bitcoin, since you will need to work with one chart — BTC/USD. If you are to trade other altcoins, such as ETH, EOS, or XRP, you will need to follow three charts. Take ETH as an example: you will have to analyze ETH/USD, ETH/BTC, and BTC/USD charts if you wish to trade this asset efficiently. Relying solely on the ETH/USD chart will not do the job. Although the chart may look good, the BTC/USD chart may look alarming, and whenever BTC drops, other coins often follow.
9. Utilize Fundamental Analysis
Keep an eye on the news. Many ignore positive news, which may lead to delays in asset growth. Some excellent news on partnerships or project development can cause a reverse in price action and turn a downward movement into an upward one. We’ve witnessed a 200% increase in the coin’s price due to a website redesign announcement, as well as a 20% increase after an important partnership announcement. A combination of TA (Technical Analysis) and FA (Fundamental Analysis) can help better understand the market than each of these tools individually.
10. Secure Your Assets
When it comes to cryptocurrency margin trading, you need to keep in mind that your funds are digital. This means that attackers can hack the system and steal coins at any time. Many exchanges have protection against such cases, but, nevertheless, such an opportunity exists.
The funds which are not used for trading can be placed in cold storage wallets. Thus, you will still have funds waiting on the sidelines. This approach reduces the risk of a hacker attack and the loss of all savings.
Margin trading is an advanced trading tool that allows for significant profits as well as rapid losses. You should study this tool in detail and clearly understand all the associated pitfalls prior to using it. The above recommendations will help both beginners and experienced traders improve the quality of trading and avoid losing money to simple mistakes.