What Is Margin Trading?
Also known as: Margin Trade, Leveraged Trading, Trading on Margin
In short
Margin trading is a leveraged trading method in which an investor posts assets in their account as collateral (margin) and uses funds borrowed from the exchange to open positions larger than their own capital; it magnifies both gains and losses.
In margin trading, the investor posts a certain amount of collateral and the exchange provides additional funds according to the selected leverage ratio. For example, an investor using 5x leverage with $1,000 of collateral can open a $5,000 position. In spot margin trading, the investor actually borrows to buy assets, or sells a borrowed asset to open a short position, and pays interest on the debt they use.
Exchanges generally offer two collateral models. In the cross margin model, the entire balance in the account is used as collateral for open positions; this can delay liquidation but puts the whole balance at risk. In the isolated margin model, the collateral allocated to each position is limited and the potential loss stays limited to that amount.
Leverage magnifies losses by the same proportion as it magnifies gains. If the price moves against the position and the collateral falls to the maintenance margin level, the position is liquidated. Because of the high volatility of the cryptocurrency market, margin trades can lead to serious losses in a short time; in some countries, the leverage ratios offered to retail investors are limited by regulation.
Last updated: · This content is for information purposes only and is not investment advice.