Contract trading (also referred as perpetuals trading or derivative contract trading) can be leveraged. Margin trading is often described as trading with leverage. In other words, contract trading is a trading mode where a trader can enter into a transaction with only a fraction of the full cost of the asset.
Nick has $1,000 on his account. He can use it to buy contracts worth 5 BTC at a price of $4,000 per 1 BTC. Nick anticipates that the price of Bitcoin will grow, and his forecast turns out to be correct. Over the next few days, the price of BTC increases by $500, which means he earned $2,500.
If Nick had traded on the spot market, he would have been able to buy only 0.25 BTC and would have earned $125.
But imagine that Nick’s forecast turned out to be wrong and BTC decreased by, let’s say, $100. This way, Nick lost $500 on the leveraged position instead of the $25 he would have lost on spot.
To learn more about margin trading and its advantages, and risks read the article “Running the Margin Blade — Trading Smart With Leverage.”
Remember that trading cryptocurrencies involves significant risks. You may suffer considerable losses and potentially lose more than you have invested. Please don’t use any trading options if you do not understand the risks.
The amount of funds a trader needs to pay to open a position is also called the initial margin. It is needed to guarantee that traders will be able to fulfill their obligations should the market move against them. Most traders use x2 – x5 leverage.
If the trader’s prognosis turns out to be wrong and they keep losing funds, the exchange needs to keep the trader’s margin account balance positive or equal to zero. To meet these goals, there’s something called the maintenance margin. This is the minimum amount of funds needed on the account to keep the leveraged position opened. Once the equity balance reaches the maintenance margin level, the position is liquidated by the exchange. This means the exchange puts a buy/sell order on the market at the current market price.
To protect your positions, using stop-loss and take-profit orders is highly recommended.
Currently, a maximum leverage of x20 is available on Xena Exchange. That means that the trader needs to pay only 5% of the value of a position. In the future, with the growth of liquidity on the exchange, the leverage will be increased to x100. This way, the trader will need to pay only 1% of the value to open a position. Contract trading provides traders with larger outcomes, both in terms of profits and losses.
To learn more about margin trading and its advantages and risks, read the article “Running the Margin Blade — Trading Smart With Leverage.”