Cryptocurrency Margin Trading Beginner’s Guide
For those who are interested to know more about cryptocurrency margin trading, we have written a margin trading beginner’s guide that explains every aspect of margin trading with leverage. We have chosen ByBit as an example because they offer the most features. Our cryptocurrency margin trading beginner’s guide contains a list with the most important features and basic explanations.
Margin Trading User Interface Overview
Usually, the user interface should contain all the information someone needs. In the screenshot, the interface contains the following sections: the chart, the order book, the recent trades, the order types, the contract details, the market activity and the positions already set (running, active, conditional, filled and order history). Our cryptocurrency margin trading beginner’s guide explains all of them below.
Margin Trading Orders Type: Limit, Market and Conditional
When you want to open a position, most exchanges offer 3 types of orders: limit orders, market orders and conditional orders.
Limit Orders: if you choose a limit order, you have to enter a price to execute your order and once the market price reaches and price you set, the order will be executed.
Market Orders: if you choose a market order, your order will be executed at the current last traded price. This means your order will be executed right away.
Conditional Orders: if you are an advanced trader, you can choose a conditional order. You can choose between limit price or market price and you also have to set a trigger price. When the market price reaches the trigger price, your limit order will be placed into order book and is ready to be executed. Conditional orders are automatically submitted if specified criteria are met. They can be used to set long or short orders.
Margin Trading Positions Beginner’s Guide: Long or Short
When you trade with leverage, you have 2 options. To enter a long position or to enter a short position. This means that you “bet” that the price will go up or will go down. We say “bet” because you don’t actually trade. You don’t sell or buy a coin. You only say which way it goes. If you’re right, you make profit, if you’re wrong, you lose some funds.
Long Position: this means that you’re confident that the price will go up.
Short Position: this means that you’re confident that the price will go down.
Cryptocurrency Margin Trading Beginner’s Guide – How to Place an Order
Once you go through our beginner’s guide, you will be able to understand every aspect of cryptocurrency margin trading and, of course, you will be able to properly trade. Below we will explain how you can place an order.
Placing an order with leverage beginner’s guide:
- First you choose the leverage. This means that the amount you want to enter a position with will be multiplied by the leverage you choose.
- This is the order price. In our example the current market price. The order will be active right away.
- The quantity you want to trade. It is also called contracts, one contract value being 1 USD in our case. Since 1 Ethereum is almost $310 and we enter a position with 10x leverage, the quantity should be 3100. If you change the leverage to 25, the quantity should be 310 x 25. You will still enter the position with 1 Ethereum.
- That’s the final amount you enter your position with, in our case 10 Ethereum, because your entry is 1 Ethereum and the rest comes from the exchange. You don’t have to pay them back in case you get liquidated. If you choose 100X, you will actually enter the position with 100 Ethereum, having only 1 Ethereum.
- That’s your amount you enter a position with (long or short), in our case 1 Ethereum. Basically, you enter with 10 Ethereum but you only need 1 Ethereum to enter this position.
- You can set a take profit price but you don’t have to. You can also adjust it when the position is running. We entered a long position and we set our take profit 10% up.
- In a normal trade, you get 10%, but, since the leverage is 10x, the profit will be 100%. You will have 1 Ethereum profit.
- We always recommend setting a stop loss price. In our case, the stop loss is set around 3% below the entry price, at $300.
- If the stop loss will be triggered, that’s the amount we lose. Around 30% from 1 Ethereum, not from 10 Ethereum and that’s the good part. The bad part of that the price dropped 3% but we lose 30% since the leverage was 10X.
- The liquidation price is where you lose the whole amount you entered the position with. In our case, 1 Ethereum. The higher the leverage is, the closer to your entry the liquidation price will be. But, if you set a stop loss, you won’t be liquidated.
Basically, that’s all you need to know when you enter a position.
How to add to an existing position?
If you want to add contracts to an existing position, you can do this easy. Simply follow the steps above and add additional contracts. Make sure that you choose the same position type. If your current position is long, you can only add to it by adding another long position. The additional contracts will be considered from the current price, not the initial price when you started the position. If you are in a long position and you add a short one, you will cancel the contracts from the long one.
Margin Trading Open Positions Explained
First of all, you should know that you cannot enter multiple positions for the same coin. You can add to an existing position or partially close but you cannot have two running at the same time. You can have open positions for multiple coins, one for each coin. Also, if you have an open position, you may set a conditional one that will be triggered when the condition you set is met.
Once you enter a position, it will be listed in a separate section, in our case, at the bottom. There you can see the coin, the quantity, the value of the position including the leverage, the price you entered, the liquidation price, the margin/leverage (how much from your funds you entered with and the leverage you have chosen), the unrealized P&L(%) (unrealised profit and loss on this contract, and return on equity percentage; how much you won or lost until the current time), the daily realized P&L (how much you won or lost on the current day) and the TP/SL (take profit, stop loss and trailing stop you have set, if any).
In our example, you can see an open position and 2 conditional positions. We did not actually set a conditional position but we set a take profit at $9,600 and stop loss at $9,200. Those were added automatically to the conditional positions since they will be triggered if any of those prices will be reached.
The unrealized profit / loss shows you in real time how much you may win or lose at the time being.
How to set or change the take profit the stop loss while the position is active.
Once your position is active, you can anytime activate, update or deactivate the take profit price and the stop loss price. We will explain the trailing stop later since it’s not too common. When you change the take profit and stop loss prices, the related amounts will also be recalculated, so you know exactly where you are heading to.
Margin Trading Beginner’s Guide – Trailing Stop Explained
The trailing stop feature is a feature specific to ByBit and it is amazing. While you can change anytime the stop loss of a running position, by using a trailing stop, the stop loss changes automatically. What does this mean? in our example we set a $200 trailing stop. By the time we set the trailing stop, Bitcoin price was $9,350 and the trailing stop is $200. This means that initially the stop loss will be at $9,150, $200 lower.
But, if Bitcoin goes up, the trailing stop follows, always moving the stop loss $200 below the current price. If Bitcoin reaches $10,000, the stop loss will be at $9,800. The trailing stop moves only in one direction, the direction you trade for. If you’re in a log position, the trailing stop moves only up. If you’re in a short position, the trailing stop moves only down. This way, you increase the chances to secure some profit, in case there will be a change against your trade.
If Bitcoin reaches $10,000, your trailing stop moved to $9,800 and Bitcoin drops below this price, your position will be closed. Considering that you entered at $9,350 and you exit at $9,800, you will have a nice profit. Without the trailing stop loss, you can even get liquidated.
You cannot set a trailing stop when you enter a position. You can do this only be editing your position.
Margin Trading Replenishment Beginner’s Guide
In our beginner’s guide, we also explain what margin replenishment is and how you can use it. This feature is also implemented only by ByBit. They offer most features and for this reason we have chosen them as an example for our cryptocurrency margin trading beginner’s guide.
The auto margin replenishment feature allows you to automatically add margin to your position of the liquidation price has been reached. This feature may help you from being liquidated but you may also lose more funds. In order to activate this feature, you need to have available margin (funds) in your account. If you have no problem going all in, you can use this feature. Otherwise, you shouldn’t use it.
How auto margin replenishment actually work? Our beginner’s guide explains everything.
Let’s say you have 2 Ethereum and you open a position with 1 Ethereum when the price is $300. Let’s suppose that the liquidation price is $270 and it has been reached. Normally, your position will be closed and you lose 1 Ethereum. If you have activated the auto margin replenishment, the system may add automatically the other Ethereum you still have and it will adjust accordingly the liquidation price. Let’s suppose the new liquidation price is $240, instead of $270 and the current price is $260. You may say you were lucky that your position was not liquidated if the price will go up again. But, if the price will reach the new liquidation price, $240, your position will be liquidated and you will lose 2 Ethereum, the one from the start and one from the auto margin replenishment.
So, think twice before you use this feature. And, of course, this feature won’t trigger if you set a stop loss. It triggers only when your position is about to be liquidated.
Margin Trading Beginner’s Guide – The Liquidation Price
We guess the only thing we don’t like about margin trading is the liquidation price. The liquidation price represents one of the differences between trading and margin trading. If you trade without leverage, the liquidation price is $0. If you trade with leverage, the liquidation price is set against the position you’re opening (long or short) and it’s set depending on the leverage you choose. The higher the leverage is, closer to the entry price the liquidation price will be. So, higher the leverage, higher the risk to lose your funds.
In our example, we have entered a long position with 1 Ethereum and 10x leverage, when the market price was $308.85. The system set the liquidation price at $282.55.
If we would have chosen 50x leverage, the liquidation price would have been closer to our entry price, probably, around $300. Higher the leverage, higher the risk to have your position liquidated.
If we would have chosen 5x leverage, the liquidation price would have been set around $250.
No matter what leverage you use, 5x or 100x, if the position will be liquidated, you lose only the amount you entered the position (the margin), not the leveraged amount. If you enter with 1 Ethereum and 5x leverage (totally 5 Ethereum position) and you get liquidated, you lose 1 Ethereum. If you enter with 1 Ethereum and 100x leverage (totally 100 Ethereum position) and you get liquidated, you lose 1 Ethereum.
The only difference is the liquidation price. That’s all. You won’t lose more if you choose a higher leverage, but the liquidation price may be reached faster.
How to Close a Position
If you went through our cryptocurrency margin trading beginner’s guide, you know already how to open positions and also change them. But, you may also want to close a position. If you have set a take profit price, your position will be closed automatically when that price is reached. If you want to close a position at any time, you can do this via 2 methods:
- You may place a new order in the opposite direction of your current position (eg. current position 1 BTC long, to close the position, place an order for 1 BTC short). The position will be closed once the order has gone through.
- You can click on the “Limit” or “Market” buttons and close your position right away.
How to Partially Close a Position
Like you can add margin to an existing position, you can also partially close an existing position, if you want to secure some profit.
All you have to do is to click on the “Limit” or “Market” buttons in the Positions section and choose how much from your position would you like to close. In our example, we have an open position with 10,000 contracts. You can click on 1/2, 1/3 or 1/4 to close half, a third or a quarter of the position or you can enter an amount of contracts you would like to close. Those contracts will be removed from your position at the current price and the remaining contracts will stay open.