Novice digital asset traders often use leveraged funds to increase potential profits without paying attention to the high risk of losing their own deposit. How not to make such mistakes and keep your money safe
Many novice traders try to use borrowed funds to trade cryptocurrencies, as they can significantly increase potential profits. However, the use of leverage carries a high risk of losing your deposit. To understand how to use this tool, you need to understand how it works.
What is leverage
Leverage is borrowing money from a broker to open a position. For example, if there is a $ 1,000 deposit and a leverage of x2, you can open a position for $ 3,000. When borrowing funds from a broker, the trader's funds always act as collateral, since in this way the trading platform insures itself against possible losses. It is also worth considering the fact that the broker issues a loan at an interest rate that usually exceeds the average interest rate in banks.
If an open position with a leverage of $ 3 thousand brought a loss of 25%, then the trader will lose most of his deposit ($ 750). A trader loses $ 250 from his own $ 1,000, and another $ 500 of loss is a loss from borrowed funds ($ 2,000). Moreover, the trader's loss will be a large amount, since it is also worth considering the interest rate on the loan.
If the open position brought 25% profit, then the trader will receive $ 750 ($ 250 from his deposit and $ 500 from borrowed funds) minus the interest rate on the loan. This means that in case of a successful transaction, the trader will increase his capital by 75%, and in case of an unsuccessful transaction, he will lose 75% of his funds.
What is the difficulty
Leverage is a complex financial instrument that can be used by every trader, but for this he needs to have extensive experience in trading digital assets, explained Mikhail Karkhalev, financial analyst at Currency.com crypto exchange. According to him, the main mistake of newcomers when working with leverage is excitement and the desire to earn a lot at once.
“Large leverage can really bring incredible profits, however, if you try to work with leverage on a demo account for fun, you will see that with 100x leverage, the deposit can literally go away in a matter of seconds,” the analyst noted.
For too impulsive and gambling traders, Karkhalev did not recommend using a leverage greater than x5.
The Beginner's Trap
Often novice traders use borrowed capital to make transactions, because they have a small deposit, but they want to earn a lot even now, said Andrey Podolyan, CEO of Cryptorg.
“This is a big mistake. First you need to learn not to lose, ”the expert added.
According to Podolyan, you can start trading with small leverage after six months of trading without losses. According to the expert, one of the advantages of trading with leverage is the ability to make money on falling markets. Also, borrowed funds can be used to hedge positions on the spot market, Podolyan added.