Beginning traders in the digital asset market often use borrowed funds to increase potential profits, ignoring the high risk of losing their own deposit. How not to make such mistakes and secure your money?
Many novice traders try to use leveraged funds to trade cryptocurrency, as they allow you to significantly increase the potential profit. However, using leverage comes with a high risk of losing your deposit. To understand how to use this tool, you need to understand how it works.
- What is Leverage?
Leverage is borrowing money from a broker to open a position. For example, if you have a $1,000 deposit and x2 leverage, you can open a position for $3,000. When borrowing funds from a broker, the trader’s funds always act as collateral, since in this way the trading platform insures itself against possible losses. It is also worth considering the fact that the broker issues a loan with an interest rate that usually exceeds the average interest rate in banks.
In the event that an open position with $3,000 leverage results in a 25% loss, the trader will lose most of his deposit ($750). The trader loses $250 from his own $1,000 and another $500 loss is a loss from borrowed funds ($2,000). Moreover, the trader’s loss will be a large amount, since the interest rate on the loan should also be taken into account.
If the open position brought 25% profit, then the trader will receive $750 ($250 from his deposit and $500 from borrowed funds) minus the interest rate on the loan. This means that in case of a successful transaction, the trader will increase his capital by 75%, and in case of an unsuccessful transaction, he will lose 75% of his funds.
- What is The Difficulty?
Leverage is a complex financial tool that every trader can use, but for this he needs to have extensive experience in trading digital assets, the main mistake of beginners when working with leverage is excitement and the desire to earn a lot at once.
“High leverage can really bring incredible profits, however, if you try to work with leverage on a demo account for the sake of interest, you will see that with a leverage of 100x, a deposit can literally go away in a matter of seconds,”
- Newbie Trap
Often, novice traders use borrowed capital to make transactions, because they have a small deposit, but they want to earn a lot even now.
“This is a big mistake. First you need to learn not to lose, ”
you can start trading cryptocurrency with a small leverage after six months of trading without losses. One of the advantages of trading with leverage, the expert called the opportunity to earn in falling markets. Also, borrowed funds can be used to hedge positions in the spot market.
