What is Leverage?
Leverage allows you to increase the value of your trades. Leverage is often used in the traditional foreign exchange market, although it has made its way into the multi-trillion-dollar cryptocurrency space. When you apply leverage to your position, you are actually borrowing money from the broker. Leverage is provided by the dealer and allows clients to trade with more than their own funds. The funds provided by the dealer are not deposited into the customer’s account. Still, they are allocated according to the leverage ratio corresponding to the trading tool or the customer-defined ratio when the customer opens a transaction.
What does Leverage Means?
Leverage means making larger investments with small funds to realize the benefits of doubling the income from small and large. But at the same time, you must bear the risk of doubling the loss that may be caused. Because digital asset prices fluctuate greatly, please be sure to fully understand the risks of leveraged trading and use it prudently.
Five things to pay attention to when trading with leverage
1. Use tight stop loss
Stop loss must be set for each order, which means that when your loss in this transaction reaches the set stop loss point, it will automatically close the position and stop the trade rather than continue to lose money.
2. Short-term and ultra-short-term transactions
A long time to make an order means increased risk because we never know what will happen in the cryptocurrency market in the next second. For example, closing orders within 30 minutes and doing short-term and ultra-short-term transactions can reduce risks. When the market fluctuates greatly, there may be huge profits or losses, which is relatively taboo.
3. Spot the time to enter the market
Most investors believe that the current cryptocurrency market is not stable. At present, investing in the currency circle also means certain risks. However, leveraged trading is a bit riskier than regular cryptocurrency investing. Therefore, when conducting leveraged trading, choose short-term investment as much as possible and avoid staying in the trading market for a long time. The longer the time, the higher the cost will be.
4. High price volatility
Pay attention to price fluctuations in the market. When the market price fluctuates more, the price will rebound rapidly. By analyzing and evaluating the trend of the K-line, predict the turning point of market price fluctuations, pick the right time, and conduct leveraged transactions. At the same time, when entering the market, make sure you have enough data and analysis to support your decision.
5. Ensure Extra Cash
At any time, you must save your living expenses, have spare money on hand, and ensure your daily expenses, so that you can hold coins with peace of mind and welcome the bull market with peace of mind. In reality, many people fall before dawn because of various problems that need to be cashed out. I hope everyone will not become such a martyr.
How leverage is Calculated?
Most online foreign exchange transactions are carried out by means of margin. Regardless of the leveraged transaction, leverage effect, leverage ratio, magnification, etc., mentioned in the market, they all refer to “the same thing.” Investors only need to invest a part of the margin in establishing and maintaining a complete contract with a large contract value through “leverage.”
Calculating leverage is not difficult, it can be explained by several formulas:
Margin requirement = contract value (position) / magnification (leverage)
Leverage Ratio = Margin Requirement / Total Contract Value (Position)
Magnification (leverage ) = 1 / leverage ratio
For example, let’s say you want to go long BTC/USD. You are prepared to risk $500 on this trade and decide to apply 1:5 leverage. In theory, this means you are now trading $2,500 – even if you only have $500 in your account.
Perhaps the easiest way to look at leverage is that you will multiply your potential profits and losses. For example, if you made a 500% gain on a $10 BTC/USD position, this would usually equal a $50 profit. However, by applying 1:5 leverage, this $50 profit increases to $250
What is Leverage Loan?
Leverage loan means borrowing some funds from a broker. Suppose the price of Bitcoin is $10,000.A user has $1,000 in Bitcoin (0.1 BTC) in his account and wants to open a buy position with 100x leverage. In short, traders can multiply 0.1 BTC by 100. This means he has the opportunity to open a buy position worth 10 BTC or $100,000.Transaction size is also known as notional value.
If the price of Bitcoin rises to $10,500, users can close their positions for a profit of $5,000 and get their original funds back. As a result, the user’s funds are increased by 5 times. Conversely, if the Bitcoin price drops from $500 to $9,500, users will lose their entire $1,000 position.
If a user opens a position without using leverage, they need to deposit a total of $100,000 or 10 BTC to get the same amount of market risk.