The Secrets to Building a Profitable Cryptocurrency Leverage Trading Plan
Cryptocurrency markets are highly speculative and volatile. In order to make money trading cryptocurrencies, you need to have a plan. This article will teach you the basics of cryptocurrency leverage trading, including how to, set your stop losses, and determine your profit targets.
Many experienced traders will reiterate that traders who lack proper knowledge of derivatives and leverage should stay away from it. They are right, as leverage is a risky business. But has risk ever stopped traders from pursuing their trades? Afterall bear market always presents the best investment opportunity. Learning leverage trading in cryptos could be the best strategy to maximise your profits.
Even if your investment capital is small, you can gradually increase it with a proper plan and strategy. Employing a risk management strategy will mitigate losses and boost your investment. So, how to get on with leverage trading, and what are the best practices in crypto leverage trading? Read along to find out.
Understanding Crypto Derivatives
A crypto derivative is a part that represents the value of the underlying crypto asset but not the underlying asset itself. Crypto derivatives, which also take the form of a contract between two parties, are only used as speculative indicators. The terms bind this contract that a person will sell a crypto asset to the counterparty at a purely speculative price in the future and vice versa. The primary function of crypto derivatives is to make it easier for traders to hedge the price of volatile assets they own.
For example, if a trader believes that the price of a crypto asset will fall, they may decide to sell (short) the crypto to a third party to eliminate downside risk. Similarly, traders can speculate that a cryptocurrency will gain in value and buy it at the best possible price and time.
Crypto Derivatives Leverage Your Crypto Trading
Cryptocurrency derivatives are vital to crypto trading as their functions extend far beyond an individual trader's trading portfolio. Derivatives are crucial to any well-developed financial system and help recognize cryptocurrencies as asset classes. In addition, you can leverage your crypto trading with cryptocurrency derivatives as they increase liquidity, reduce risk, facilitate portfolio diversification and optimise pricing.
What is Leverage in Crypto Trading?
Using borrowed capital to trade is called leverage. Leverage trading allows you to increase your buying or selling power, allowing you to trade more significant amounts. You can use your initial capital as collateral for leveraged trades, even if it's small. While leveraged trading can multiply your potential profits, it also carries a high level of risk, especially in the volatile cryptocurrency market. It is often recommended to be careful when leverage trading in cryptos. If the market moves against your position, it can result in significant losses.
Popular Crypto Derivatives For Leverage Trading
The most prominent derivatives in the crypto industry are futures, options, and perpetual contracts.
Future is simply a contract or agreement between two parties to buy and sell a crypto-coin at a particular value on a future date (hence the name). However, neither party is obligated to hold the underlying asset. Instead, they settle the contract in USD or another agreed currency. What differentiates futures contracts from other crypto-derivative instruments is the specific settlement date.
Options derivative contracts track the price of a crypto asset, but they do not have to be settled at their expiration dates. The term "options' ' refers to the fact that they provide traders with the opportunity or right to buy or sell at a pre-decided price on specific future dates.
Unlike futures or options, perpetual contracts are crypto derivatives that do not have an expiration or settlement date. Traders can hold positions as per their liking and profitability, subject to certain conditions. One of them is that the account must have a certain amount of cryptocurrency (margin).
Pros and Cons of Leverage Trading Crypto
Like all trading strategies, margin trading with assets such as cryptocurrency offers advantages and disadvantages. In general, the benefits and drawbacks are well-represented.
- For example, your potential rewards are higher, but so is the amount of money you could lose if a deal goes against you.
- Similarly, you may rapidly and effectively diversify your portfolio at the expense of far higher risk than other trading strategies.
- Leverage frees up your capital as you only have to stake a fraction of the value of the assets you are trading. You can take much larger positions than possible when trading the underlying asset itself.
- Crypto leverage trading allows you to make the most of your capital and perhaps invest in different asset classes rather than being limited to one or two.
- Your winnings are often multiplied many times over
7 Steps To Follow To Master Crypto Leverage Trading.
While we all know there is no sure shot to success in trading, some repeated methods have been instrumental in increasing the winning percentage in trades and minimising losses. Read along to find out the best strategies to employ when leverage trading crypto.
Having A Plan
It is essential to possess a game plan before trading, Margin trading, especially as there's an excellent risk factor. Once you clearly understand the principles you learned, you'll build various strategies. Strategy is that one thing that differentiates professional trading from gambling.
Considering that the cash you are investing in a margin trade isn't yours is the best way as you're not sure how your trades will go. Please don't rush into it full-on. Have a little and clear portfolio.
Lock Your Gains And Diversify Your Investment
The moment you realise that trading makes you life-changing amounts of cash, it's better to take advantage of your earnings. It means removing money from the crypto markets completely and diversifying it elsewhere.
Manage Risk When Using Crypto Leverage
The odds of you winning the trade aren't guaranteed at all. Hence Risk Management is essential to mitigate the Loss. Technical analysis is an efficient way to understand and master the price action and frame your technique and strategy. It would help if you reduce counterparty risk, Position size, set stops, or hedge your position to reduce the danger while you leverage Cryptos.
Trade The Spot Market Before Leverage Trading Cryptos
Spot markets contain simply buying and selling any asset. The charts you see there are far more stable than any Cryptocurrency charts. Before considering leveraged trading, every new trader should be constantly profitable within the spot markets. Using leverage will increase your gains and expose you to losses. It is often perfect for day trading but confirms you recognize what you're doing.
Trade In Fiat When Prices Are High
It is a general practice that most altcoins are traded using Bitcoins, as in most of the exchanges, altcoins are paired with BTC. Once you leverage trading during crypto bear trends, it's often best to use USD or other fiat currencies as your ammunition. Employing a depreciating asset as your collateral can increase your losses.
Take Profit And Put Stop Losses
It is critical to take out profits along the way on the winning trades. There are many instances where "stop order hunting" with big institutions pushing the price past support or resistance. When this happens, your order might not execute at the trigger price but close you out at the worst possible price where you can't make more profits. When using crypto leverage, this is often undoubtedly important.
While margin trading and leverage can provide greater flexibility and market exposure, it is critical to understand the risks before using leveraged money. The most crucial thing to remember here is to maintain precise control over the amount of money you risk on each trade and across your entire trading portfolio. If you can do that, you'll be able to stay in the game and keep your stress levels low.
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