Margin trading allows users who are prepared to take on more risk to get more out of their capital and enter larger positions. This is achieved through borrowing funds. The ratio between the position size and your margin (the capital you committed) is called leverage. Higher leverage means higher potential profits, but also increases the risk of losses. For example, you could use $1,000 worth of funds to enter a trading position worth $5,000, which would be an example of using 5:1 or 5x leverage.
Margin trading makes it possible to enter both long and short positions. Long positions turn a profit if the price of the asset increases compared to the entry price, while short positions turn a profit if the price of the asset decreases compared to the entry price.
Margin trading explained
Here’s how it works. Let’s say that you think the price of Bitcoin will increase in the short term, and you want to commit $500 to the trade. Your confidence in the trade is relatively high, so you want to increase your buying power through margin trading. You use your inital $500 as margin to borrow an additional $500. Your position is now worth $1,000, which means your leverage is 2:1, or 2x (1000/500 = 2). If Bitcoin increases by 20%, you will profit $200 (with no leverage and a $500 investment, you would only profit $100 in this scenario). However, if Bitcoin drops by 20%, you will be down $200 (with no leverage and a $500 investment, you would only be down $100 in this scenario).
If you’re wondering where the additional funds are coming from, the answer is quite simple. Users that want to earn interest on their crypto holdings can lend them out to margin traders, in exchange for interest. When it’s time to close your margin trading position, you will have to return the borrowed funds (plus interest charged by lenders). In some cases, the cryptocurrency exchanges themselves can also function as lenders for the purposes of margin trading.
Generally, it’s advisable to use lower leverage ratios when trading highly volatile assets. In the foreign exchange (forex) markets, where price movements are typically small, it’s not uncommon to see leverage of 100x and above. When trading a more volatile asset (like most cryptocurrencies), using high leverage increases the risk of losses exponentially.
When trading on margin, you risk losing all of the funds that you initially committed to the position as margin. This scenario is called a liquidation, and involves your collateral automatically being sold at the current market rate to repay the funds you borrowed.
Get the most out of your margin trading on Binance with these 4 tips
In the cryptocurrency market, Binance is among the most popular venues for margin trading. One of the biggest advantages of Binance is that it offers margin trading for a very large number of different cryptocurrencies, and it also allows traders to take on leverage of up to 10x on selected trading pairs. In this article, we’ll be going through some useful tips that will come in handy when margin trading on Binance.
Explore Margin Trading on Binance
1. Earn rewards with Funday Friday
Active margin traders on Binance can earn additional rewards. Users who have a daily trading volume of at least 1,000 BUSD and have a daily average of borrowed funds above 100 BUSD are eligible for rewards via Binance’s Funday Friday promotion. Each Friday, Binance distributes 20% of the collected margin fees to active margin traders on the platform.
Users with larger trading and borrowing volume receive bigger rewards. Trading volume has a bigger weight, as 15% of Binance’s margin fees are distributed according to trading volume. The remaining 5% is distributed on in accordance with each user’s borrowing amount. The trading volume and borrowing amount is measured throughout each week, starting with Thursday.
Users receive rewards in the form of BUSD, a stablecoin that’s pegged to the US dollar at a 1:1 ratio. Traders who want to claim their Funday Friday rewards have to do so within 5 days, after which the rewards are no longer accessible.
More information about Binance’s Funday Friday promotion for margin traders is available on the official Binance website.
2. Choose between isolated and cross margin
Binance offers two main types of margin trading, which have some important fundamental differences. These are called "isolated margin" and "cross margin". When using isolated margin, the risk is limited to individual trading positions. For example, if you use the isolated margin mode to go long on the BTC/USDT trading pair, your risk is limited by the initial margin that you provided to open the position. If your position gets close to liquidation, you can manually provide additional margin to improve your margin level. When trading in isolated margin mode on Binance, you can access leverage of up to 10x.
In the cross margin mode, funds from your entire cross margin account can be used to avoid liquidation. Using cross margin is more convenient, but also has higher potential downside. If you use cross margin to enter a trade that’s going very poorly, your entire cross margin account could be liquidated if you don’t exit the losing trade on time. When trading in isolated margin mode on Binance, you can access leverage of up to 3x.
Please note that you cannot change the margin mode of positions that are already opened. For example, if you go long on BTC/USDT in the isolated margin mode, you cannot switch it to cross margin mode while keeping the position open.
3. Monitor your margin level
The margin level determines the risk of your margin trading position. The higher your margin level is, the safer your account / position is. If your margin level drops down to 1.3, you will first receive a margin call, which is a notification that the position is in danger of being liquidated. In this scenario, you have two options if you want to protect the position against liquidation and increase your margin level. You can either supply additional collateral, or partially repay the borrowed funds.
If your margin level falls down all the way 1.1, your collateral will be liquidated. This is the worst-case scenario when trading on margin, so try to avoid it.
1.3 and 1.1 are not the only margin levels that you should be on the lookout for. Depending on your margin level, your ability to borrow or transfer funds out of your margin account can be impacted. In addition, the margin level functions differently depending on if you’re using the cross margin or isolated margin mode. For a full breakdown of the key margin levels on both margin trading modes, please refer to the Margin Level and Margin Call section on the official Binance website.
4. Avoid irresponsible trading decisions by using the Cooling-off Period
Margin trading is a high-risk activity that can provoke strong emotions in traders, both in the positive and negative sense. For example, a trader who has just incurred a big loss might want to "win it all back" by immediately entering a new, high-risk trade. This kind of behavior usually spirals downwards and leads to even bigger losses.
Binance has introduced a feature called "Cooling-Off Period" that helps users take a step back from trading and avoid making irresponsible decisions. This feature allows users to prevent their account from being able to margin trade. Users can choose a between a Cooling-Off Period of 1 day, 3 days, or 1 week. After activating a Cooling-Off Period, the user’s account is not allowed to engage in margin trading or borrow funds for the selected time period. Once activated, a Cooling-Off Period cannot be cancelled until the specified time period elapses.
Conclusion
Margin trading provides additional flexibility to traders, as they can leverage their existing capital to a bigger extent and enter larger positions. Binance has created a well thought out margin trading platform, which offers a big selection of trading pairs and a host of advanced features. Hopefully, this article provided helpful information that will come in handy on your Binance margin trading journey.
Please keep in mind that margin trading is very risky, especially if you are trading cryptocurrencies. Make sure you understand how margin trading functions before entering a position, and don’t invest more than you’re willing to lose.
