WHY SHOULD I TRADE WITH BINANCE MARGIN?
11/06/2022
By Damilola Ogungbayi olushola
Key points
- Introduction of Margin Trading in Crypto World
- How does margin trading work?
- Why is Binance Margin good for you?
- Diverse trading pairs
- Multi-asset collateral
- Cooling-off period
- Insurance fund - Examples/ Cases of using Binance Margin
- Make your first trade on Binance margin
- Conclusion
INTRODUCTION OF MARGIN TRADING
Margin trading is a method of trading assets using funds provided by a third party. When compared to regular trading accounts, Margin accounts allow traders to access greater sums of capital, allowing them to leverage their positions. Essentially, Margin trading amplifies trading results so that traders are able to realize larger profits on successful trades. This ability to expand trading results makes Margin trading especially popular in low-volatility markets, particularly the international Forex market. Still, Margin trading is also used in stock, commodity, and cryptocurrency markets.
In traditional markets, the borrowed funds are usually provided by an investment broker. In cryptocurrency trading, however, funds are often provided by other traders, who earn interest based on market demand for Margin funds. Although less common, some cryptocurrency exchanges also provide Margin funds to their users.
INTRODUCTION MARGIN TRADING IN CRYPTOCURRENCY MARKETS
Trading on margin is inherently riskier than regular trading, but when it comes to cryptocurrencies, the risks are even higher. Owing to the high levels of volatility, typical to these markets, cryptocurrency margin traders should be especially careful. While hedging and risk management strategies may come in handy, margin trading is certainly not suitable for beginners.
Being able to analyze charts, identify trends, and determine entry and exit points won't eliminate the risks involved with margin trading, but it may help to better anticipate risks and trade more effectively. So before leveraging their cryptocurrency trades, users are recommended first to develop a keen understanding of technical analysis and to acquire an extensive spot trading experience.
WHY IS BINANCE MARGIN GOOD FOR YOU?
1.Diverse trading pairs
Binance Margin supports 600+ trading pairs, including some trading pairs that are not commonly offered.
2.Multi-asset collateral
Margin users are able to invest multiple assets as collateral to borrow and trade on leverage. On Binance, this can be done in the cross-margin mode. Instead of investing BTC only into a BTC-based margin trade, investors can use their BTC and ETH, or BUSD, USDT, and so on, to denominate their collateral, allowing traders to operate with more flexibility when opening trades.
3.Cooling-off period
In order to help users avoid excessive trading, users can temporarily suspend margin-trading-related activities for a specific period by activating the Cooling-off Period function. This is part of Binance’s efforts to encourage responsible trading and prevent compulsive trading behavior.
4.Insurance fund
Binance Margin has an insurance fund that protects users’ accounts when their equity (i.e. their assets minus liabilities) is less than 0, or when the user is unable to repay debts due to lack of funds in the account.
Margin Insurance Fund rules:
- If your margin account goes bankrupt, i.e., there are not enough funds in the account to repay the debt after being force liquidated, resulting in negative equity (asset-liability), the system will use the Margin Insurance Fund to repay your debt.
- Similarly, if your Crypto Loan order goes bankrupt and the collateral is insufficient to repay the debt, the system will repay using the Margin Insurance Fund.
You can check the balance of your Margin Insurance Fund by clicking [Wallet] - [Margin] - [More Data] - [Insurance Fund], or you can also view it directly from [Margin Insurance Fund].
HOW DOES MARGIN TRADING WORK?
When a margin trade is initiated, the trader will be required to commit a percentage of the total order value. This initial investment is known as the margin, and it is closely related to the concept of leverage. In other words, margin trading accounts are used to create leveraged trading, and the leverage describes the ratio of borrowed funds to the margin. For example, to open a $100,000 trade at a leverage of 10:1, a trader would need to commit $10,000 of their capital.
Naturally, different trading platforms and markets offer a distinct set of rules and leverage rates. In the stock market, for example, 2:1 is a typical ratio, while futures contracts are often traded at a 15:1 leverage. In regards to Forex brokerages, margin trades are frequently leveraged at a 50:1 ratio, but 100:1 and 200:1 are also used in some cases. When it comes to cryptocurrency markets, the ratios are typically ranging from 2:1 to 100:1, and the trading community often uses the ‘x’ terminology (2x, 5x, 10x, 50x, and so forth).
Margin trading can be used to open both long and short positions. A long position reflects an assumption that the price of the asset will go up, while a short position reflects the opposite. While the margin position is open, the trader’s assets act as collateral for the borrowed funds. This is critical for traders to understand, as most brokerages reserve the right to force the sale of these assets in case the market moves against their position (above or below a certain threshold).
For instance, if a trader opens a long leveraged position, they could be margin called when the price drops significantly. A margin call occurs when a trader is required to deposit more funds into their margin account in order to reach the minimum margin trading requirements. If the trader fails to do so, their holdings are automatically liquidated to cover their losses. Typically, this occurs when the total value of all of the equities in a margin account, also known as the liquidation margin, drops below the total margin requirements of that particular exchange or broker.
EXAMPLES/ CASES OF USING BINANCE MARGIN
Alice believes the price of BNB will go up, so she wants to open a leveraged long position on BNB. To do so, she first transfers funds to her Margin Wallet and then borrows BTC. Next, Alice uses the borrowed BTC to buy BNB.
If the price of BNB goes up as Alice expected, she can sell her assets and repay the borrowed BTC along with the corresponding interest. Any leftover for that trade will represent her profits.
However, margin trading can amplify both the gains and the losses. So if the market moves against Alice’s position, she will have bigger losses.
MAKE YOUR FIRST TRADE ON BINANCE MARGIN
Wondering how to increase your trading performance? Leverage trading strategies like margin trading can potentially increase your profits.
As you become more skilled in trading, you may wish to explore the different ways you can increase your trading performance. Consider leverage trading, a trading approach that allows investors to make spot transactions with the help of borrowed funds to amplify trading results. Margin trading is a common leverage trading strategy used by experienced traders looking to increase their purchasing power rather than be restricted by their own capital. Binance Margin lets users borrow funds to engage in margin trading to increase their position size.
Binance Margin Trading grants eligible users access to funds from the Binance Exchange for use in leveraged trades. Experienced traders looking to increase their buying power can use the Margin trading feature to amplify potential returns on long or short positions. However, leverage trading, including margin trading, involves high risks as it could potentially amplify trading losses as well. With the risks involved, it is good to always do your due diligence and read up on the pros and cons before you start leverage trading.
CONCLUSION
Definitely, margin trading is a useful tool for those looking to amplify the profits of their successful trades. If used properly, the leveraged trading provided by margin accounts can aid in both profitability and portfolio diversification.
As mentioned, however, this method of trading can also amplify losses and involves much higher risks. So, it should only be used by highly skilled traders. As it relates to cryptocurrency, margin trading should be approached even more carefully due to the high levels of market volatility.
To get started on Binance margin click on the link below
https://www.binance.com/en/trade-margin/BTC_USDT?ref=331234001
