Trading Bitcoin and Cryptocurrencies with Leverage
How to use Leverage to Reduce Margin Costs and Increase Profit
CryptoAltum allows traders to trade Bitcoin and other cryptocurrencies with up to 1:500 leverage.
Trading with high leverage is risky business.
It’s not for the faint hearted that’s for sure.
But, if you have an appetite for high-risk, high-reward trading, it could be just for you.
To see exactly how this works, we need to delve a little into the calculation side of trading.
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The profits that you generate through trading depend on:
1. The volume (lot size) of the trade (i.e. how big your trade is)
2. How much the market moves during your trade (The difference between your open and close price)
The higher the lot size is, the more profit or loss will be generated with every market movement.
Increasing Profits using Leverage
Let’s take a simple trade of 1 lot BTC as an example.
1 lot BTC is the equivalent of trading exactly 1 BTC, which has a USD value of approximately $52,000 (at the time of writing).
If you’re trading 1 lot, every time the price moves $1, you have made (or lost) $1.
Buy 1 lot BTCUSD @ 52,000 and sell when the market gets to 52,500.
Profit = $500.
Let’s see what happens if we trade 5 lots:
Buy 5 lots BTCUSD @ 52,000 and sell when the market gets to 52,500.
Profit = $2,500 ($500 x $2500).
So where does leverage come into this?
Leverage affects your buying power.
Using the above trading example, if you deposited 1 BTC, you could trade 1 BTC, but you would not be able to place the trade for 5 lots.
Because you only have 1 BTC available as margin, and a lot size of 5 lots requires 5 BTC to open.
If you deposit 1 BTC into a 1:500 leveraged MT5 account like what CrypyAltum offers, you have the potential to buy up to 500 BTC worth of currencies, so you could easily open your 5 lot BTC trade.
So that’s how you can use leverage to maximize your profits – by using it to trade bigger lot sizes.
Sounds too good to be true?
Here’s the catch, when you multiply your profits, you also multiply your losses, which can blow your account very quickly if the market moves suddenly. Which of course, it does in the crypto markets.
Not only can it blow your account, it can also result in your account going into the red, known as a negative balance. The last thing a trader wants is to have to cover their negative balance with their own funds, so it’s vital to choose a reputable broker like CryptoAltum, who offers guaranteed negative balance protection. Provided you have negative balance protection, you cannot lose more than your account value. That way, you are limiting your risk while leaving the potential for unlimited profits.
Controlling Margin using Leverage
Now, leverage does not have to be used to trade huge lot sizes in the hope of gaining huge profits.
It can in fact be used as a very useful risk management tool.
How’s that, you say?
You can use leverage to simply reduce your margin requirements. That is, the amount of funds you need to open a position.
If you want to be trading 1 whole bitcoin, if you have no leverage, you going to need 1 whole bitcoin to put down as margin.
But, if your account leverage is 1:100, you are going to need 100 times less than this.
Instead, you’d need to put down just $420 of your own funds.
If you go for the maximum 1:500 leverage, you’d need just $84.
Here’s a table to help illustrate how leverage affects your required margin:
It’s important to remember that a trade of 1 lot Bitcoin carries exactly the same risk whether it is traded on an account with 1:1 leverage, or on an account with 1:500 leverage.
Leverage can be used in two ways:
1. High-Risk, High-Reward trading which uses leverage to trade bigger lot sizes
2. Low-risk margin control trading which simply uses leverage to lower margin costs
CryptoAltum always recommends testing out any strategy on a risk-free demo account before going live.
Top Tip: Use a demo account with a similar amount of funds to what you will actually be trading with. Trading on a $1 million demo account will not accurately reflect what will happen in a $1,000 live account.
For more interesting tips and facts visit our Education Centre.
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