What is crypto leverage trading?
With crypto leverage trading you increase a position you have taken with borrowed capital. This borrowed capital is financed by the platform where you place your order. Leverage trading is a well-known concept that is not only applied within crypto. Leverage trading is also applied in other markets, such as shares. Leverage stands for leverage. And this leverage effect ensures that you can make more profit or more loss with the same bet compared to non-leverage trading.
Why trade with leverage?
It is often said that higher potential profits are the big advantage of leverage trading. That is correct, although it must be said that the larger potential losses are also a disadvantage. Crypto leverage trading simply entails more risk. And that can turn out good or bad. There is also an additional advantage that is often forgotten. Crypto leverage trading offers you the opportunity to achieve the same profit with the same bet, via multiple trades, as with non-leverage trading. Leverage trading therefore offers a certain degree of efficiency. You spread your opportunities and can achieve your set targets sooner.
Another advantage of leverage trading is that you can anticipate both price rises and price falls. We call anticipating a price increase “going long”, and anticipating a price decrease we call “going short”. In this way you can also achieve good profits in times of poor market conditions.
Because leverage trading involves more risk, risk management is extra important. Therefore, make sure you understand the concept of leverage trading before you start. It is possible to lose your entire stake, or even more than your stake, through leverage trading. To protect traders against extreme losses like this, your position can be automatically closed by the trading platform. We call this a liquidation.
How do you determine your leverage?
When you start your first crypto leverage trade, there are a number of things you should pay attention to. These are your bet, the leverage, your potential profit, your stop-loss and the risk you are willing to take.
As an example, we assume that the total value of your portfolio is 10,000 euros. You want to enter into a trade where your stop-loss is 3% below your purchase price. Suppose you choose a trading pair with 5x leverage. In this case, your stop-loss will be 5 x 3% = 15%. In the context of risk management, you have determined that you wish to lose a maximum of 2% of your total portfolio with each trade. The stake for this trade will then be a maximum of (2/15) x 100% = 13.33% of your portfolio. In other words, 1,333 euros.
Suppose you invest 1,333 euros for this trade, and you sell your position with a price increase of 8% profit. Then the leverage effect of 5 ensures a profit of 40%. In this case, your maximum loss with this trade goes from a maximum of 3% to a maximum of 15%. Please note: setting a stop-loss is crucial in the context of risk management.
Where can you trade crypto leverage?
Nowadays there are not many providers that offer crypto leverage trading. At the moment it is best to go to FTX exchange. Here you will find a wide range of leverage trading pairs. FTX is also a well-known and reliable platform that is continuously developing. Do you want to start with crypto leverage trading immediately? Then create an account with FTX now and get a 5% discount on all your trading fees!