Some participants in the investment world compare margin trading with a casino. RBC-Crypto tells you how to use leverage as efficiently as possible.
Comparison of margin trading and casino takes place if a trader uses x100 leverage and opens a position immediately for the entire capital. Most often, under such circumstances, you can lose money and only in rare cases – earn. In general, the concept of “casino” for traders who earn money using margin trading even sounds offensive. The fact is that professional traders do not try to guess the direction of price movement, but create their own trading strategies based on some concept or observation and work with risks. For example, certain candlestick patterns, various indicators, price behavior after certain events in the economy, breakouts of price levels, and so on.
Trading, like investing, is about dealing with risks in the first place. For this, there is risk management and money management. For example, a user of a crypto exchange chooses an asset for trading based on some fundamental events, counting on its growth. Then it determines the entry and closing point of the position, both in profit and loss, limiting it in case of an error. Further, it determines the percentage of capital that is ready to use, and the amount of leverage. None of the successful traders enters a position with all their capital with x100 leverage, even if they are completely confident in the future growth or fall of the price. The risk of loss is too high.
Leverage is a tool for large traders and a trap for small ones:
● Large traders use it to increase their positions or to hedge in certain situations. Simply put, they use it as one of the tools, but not the main one.
● Small traders use leverage to ramp up their deposits and try to get rich instantly. What is their main mistake.
As you know, if someone has earned in the market, then someone has lost. This is a natural process of capital flow from one person to another. Having a large capital, large bidders are able to influence the price, sell and buy where it suits them.
At the same time, small participants have to be content with chance. No matter how hard they try, there will always be larger participants in the market who have a position opposite to yours. The more leverage a small trader has, the faster his capital will pass into the hands of large players.
Do an experiment. In any trading terminal where there is a demo account, try to open a position with x100 leverage. In some cases, when the market is volatile, Margin Call may come within a minute, or even earlier. Don’t have any illusions – positions with x50 or x25 leverage are liquidated no less quickly.
Try to trade successfully on a demo account for at least a month. In order not to lose capital quickly, you will have to strike a balance between the amount of leverage and the percentage of your capital that you enter into the position. Let me remind you that leverage is a tool that is important to learn how to use. You can enter a trade with x5 leverage using 20% of capital, or with x50 leverage using 1% of capital. Form a strategy, manage risks, in which case there are chances of success, otherwise you yourself will turn trading into a casino.
In order to successfully engage in trading, including with leverage, you will need to learn a lot. After years of practice and development of your own trading strategy, you may start making money. Do not forget that not everyone can succeed in trading.
The best choice for beginners is to simply trade on the spot market. Albeit with elements of speculative trading, that is, trading, but without the use of leverage. Very quickly, without super risks, you will realize that speculative trading (even 1 to 1) is not the easiest way to make money. It is very difficult to catch the moment where you can sell or buy an asset.
Accordingly, you will quickly come to the conclusion that it is better to study assets and buy them for the medium or long term during drawdowns or after a price collapse. The so-called holders, who buy and hold, can make a fortune within a few years. So-called traders who trade with high leverage and no strategy lose all their money within a few months. That’s the whole difference.