Pros and Cons of Leverage Trading You Need to Know

One of the apparent trends in the world of cryptocurrencies today is the increasing popularity of margin trading. And as of now, you’ve already learned that cryptocurrency trading is rewarding but risky at the same time. So there are pros and cons to leverage trading. All you need to do is to be smart when making decisions and sticking to the market data. Margin trading can be used with all of the day trading strategies discussed previously.

Let me tell you that traders use modern or leverage trading. It gives you lots of benefits, yes. But it also has certain drawbacks. I thought that this post should go through what leverage trading is and what is actually under its hood. I want to clarify certain things as well so that you won’t make mistakes with this trading method.

If you’re already familiar with the leveraging method and want to start earning from it, you may want to take The Better Traders’ The Smart Trader course. It’s actually worth it because it gives strategies on developing your trading principles and learning safe leveraging as well!

But if not, I suggest you go through this post first to learn what leverage trading is and what it indicates. I’ll also let you know the benefits and drawbacks of implementing this strategy. So let’s start!

What is Leverage Trading?

pros and cons of leverage trading

It’s obvious that the rise of cryptocurrency value in the market made it possible for the mainstream media and companies to invest their stocks in exchange for one. Personally, I see that the competition in the market becomes stronger, as traders don’t want to miss something out of their fear.

Because of not wanting to lose the “golden opportunity” that a cryptocurrency value has to give, crypto enthusiasts need to have a good capital. This also means borrowing money from the broker as an additional means to support their initial capital. This is where the leverage trading takes place, where you need to anticipate the rise and fall of exchanges at the moment. You can use your earnings from this strategy to pay back loaned money and its interests.

Leverage trading is a simple concept. Instead of putting up your full value on the market, you operate on what you call a “margin.” To help you clear things out with the leverage trading process, picture this in mind:

Suppose that you have a 1000 USDT in your account, and the Bitcoin’s value is at 10,000 USDT. Clearly, your initial capital won’t make it in the crypto market since you need to have at least 10,000 to buy a whole Bitcoin. In this case, you’ll borrow 9,000 USDT from the exchange or broker to complement your owned capital. Combining your owned and loaned capital gives you 10,000 USDT, giving you enough exposure to the crypto market because you can buy a whole Bitcoin. You’ll also have a 10:1 leverage or “10x”. This margin means that for every dollar you stake in the market exchange, you’ll trade them ten times as well.

Let’s say that things don’t work well. In the next months, Bitcoin’s price went downhill to a value of 9,000 USDT. This would be an alarming situation, especially for the broker who lent you the money. To not experience the worst scenario, the broker will close your account automatically. Meaning, you won’t have the eligibility to close the trade yourself. Your broker will use your remaining cryptocurrency value to get their money back, along with the interests accommodated in it, and will leave you nothing at all.

But who are the brokers, you ask?

Brokers are individuals who lend money or Bitcoins to crypto enthusiasts to margin trade in exchange for a fee and interest rate. They provide extra money to traders provided with the agreed conditions, which the broker can use when the trader performs poorly. Besides, brokers have the right to terminate your account without further notice to refund and save their money. On the other side of the coin, having a remarkable trading process allows you to pay your broker regularly according to the agreed terms. You’re also earning at the same time.

If you’re still confused, let’s take the house investment as an example. Assuming you want a lot for $500,000. With only a $150,000 on hand, you’ll borrow $350,000 from a broker, which will be the bank in this scenario. If you see that your lot’s value went up while on it, then good for you. Otherwise, you can lose your lot and may not be able to pay the borrowed money from the bank. Your bank then acquires your lot as collateral and will use it to get their $350,000 back. This situation leaves you moneyless and houseless.

See, that’s how the leverage trading works. I know this might sound easy. But be careful, this strategy isn’t as simple as you may think. Don’t go after this strategy, especially if you’re a newbie. To get more knowledge about this, you can try taking The Smart Trader course. It gives you plenty of lessons to kickstart successful leverage trading!

Now that you’ve understood how the leverage trading works, it’s now time to get a clearer picture of its benefits and drawbacks. This is the most interesting part of this article because you’ll get to learn more about the basics of leverage trading. I’ll share my insights on leverage trading too, so let’s dive in!

Pros of Leverage Trading

I have been in the trading game for a couple of years now, making me realize what good leverage can do with my cryptocurrency value. Further, here are bountiful benefits of leverage trading can do to you:

1. More purchase power

Perhaps the most interesting and beneficial part of the leverage trading is that it boosts your buying power. When I use a margin account, I increase my “trading power” as well. It allows me to trade my current position to more elevation larger than the amount of money I initially traded with my account. What’s more, you’ll be able to diversify your portfolio to a much greater scale that you can work with. You can easily set your margin and use it to boost your returns in favor of your decisions!

2. Increased investment options

Aside from increasing your purchase power, you can easily set goals with the help of leverage trading. The process likely involves using the stocks you have at hand and complementing it with borrowed money. You’ll then use it to buy additional stocks for your account. I see that this is a good investment strategy since it provides plenty of opportunities to grow your account at a predetermined value. Although this process might be a little riskier than other known trading strategies, it still offers abundant ways to experience more money straight to your account.

3. Flexibility

Leverage trading brings flexibility to your financial assets. You can easily win big profits while using low amounts of owned capital alone. As long as you gain wins in your account, you can pay your broker regularly without even skipping an interest rate! This initiates a win-win situation to your case and your broker’s condition. You can even use your 10x position and earn big amount of funds!

4. It adheres to legal principles

Of course, no one wants to lose all their earnings in the crypto market. The good thing about leverage trading is that it executes legal practices. Even the most professional traders see trading with leverage as a way to use their capital and loaned money efficiently. Based on my experience with leverage trading, I’m able to trade markets that otherwise would be inaccessible. What’s more, I’m allowed to trade for more contracts, shares, and forex lots! Leverage trading unlocks the potentials of your account.

5. Account expansion

The best part about leverage trading? It grows your financial assets quickly! Before leverage trading took place in the market, traders (like me) find it difficult to locate resources where they can grow instantly. Unlike day trading cryptocurrencies, you can easily see growth in your position with leverage trading. It achieves greater exponential growth in the crypto market and helps control your account to a more manageable size.

Cons of Leverage Trading

Leverage trading strategies are not without risks. I’ll also explain how to leverage trading can affect your account negatively:

1. One of the riskiest strategy

On the one hand, leverage trading is riskier than any cryptocurrency trading strategies you may know. The supplemental margin trading can dry your initial investment unfavorably. As the margin influences your account, you’ll find yourself in a much greater debt: borrowed money plus the pre-existing conditions about paying it, like the interest and fees.

2. Financial investment in jeopardy

The fact that most brokers will only fund your needs if you compose a higher margin would be a pain in the neck. And mind you, creating a higher margin means putting your financial investment at higher risks as well! Another important concept in leverage trading is the margin call. It’s a broker’s way to tell you that you’re performing badly. It also denotes that your present status doesn’t meet their expectations. By the time you receive a broker’s call, expect that your account will close and will leave you a lesser amount (or nothing) than what you have initially intended for the investment.

3. Newbies don’t stand a chance

The things I’ve mentioned above requires great skills and knowledge to perform leverage trading strategy successfully. Working comfortably with a leveraged trade allows you to expand your investments across different exchanges in the crypto market. Generally speaking, if you’re a rookie in this field, I suggest you need to understand what leverage trading entails to avoid big losses in the market. Newbies don’t stand a chance on this game, but if you still want to embark on this journey, you can take The Smart Trader course organized by The Better Traders. I assure you, the course is worthwhile!

4. Registering higher margins means filing higher damages

Leveraging your financial investment also means putting your financial investments at higher risks and losing big capital on the crypto market. On this condition, you need to be aware that not all investments you’ve made with your cryptocurrency will work in your favor. There are several instances when a cryptocurrency’s value went downhill and will cause you so much pain. And the worst, even your predetermined strategies can work against you! You may also need to know that the slightest drop in the market price can cause devastating losses in your trading assets. So you need to be careful!

5. Not for traders with low-risk tolerance

The crypto market is full of uncertainties, which is the main reason why you need to consider the pros and cons of leverage trading thoroughly. Leveraged trading works best for traders who understand the high risks that come with trading. As a coach and trader, I suggest that you plan your strategies to avoid unwanted circumstances. This is primarily because playing with margin means registering your account with lots of inherent risks.

Nothing More Nothing Less

So that’s it! Hopefully, you learned all the basics of leverage trading principles and the pros and cons of leverage trading. This post covers all the essentials, the benefits, as well as the drawbacks of the leverage trading strategy.

Similar to other strategies, leverage trading can work wonders for crypto enthusiasts who want to make quick profits at hand. Well, who doesn’t! Yet, be mindful that the process involves adept understanding, skills, and resources to become successful. This is because trading cryptocurrencies is risky, made more precarious with the added leverage strategies.

I also gave some tips and tricks in this article. To sum them, you need to be extra careful and execute risk management skills every now and then. If not, then you’ll likely lose the game.

If you think you need additional resources to learn the ins and outs of leverage trading, it would be advisable to first work with an online trading course. As I’ve mentioned many times, you’ll learn more with The Better Traders’ The Smart Trader course. With over 5 hours of content spread over 14 modules, you’ll learn all the shortcuts to cryptocurrencies, active trading techniques, safe leverage trading, and so much more!