Recently I've been asked by many people what margin trading is and how to do it. And I've decided that it will be more efficient to make a post. So that anyone who is willing to do some reading can start using this tool.
First of all I picked Poloniex because it has more users daily. Personally I prefer Bitfinex, but it doesn't really matter. You can make same amount of profits on any of them. It's all about whom you trust more and who has the better reputation.
Trading on Poloniex is easy enough so I will assume that you already have some money on the exchange and know how to trade.
You will have to start with transferring your funds that will be used as collateral from your Exchange account to Margin account (using Balances/Transfer Balances). Transfer happens instantly so you don't have to worry about sending money to the wrong account accidentally. You can always reverse your actions. You can use any cryptocurrency that is in the table below, as your collateral.
The value of your collateral will always be tied to the current price in Bitcoin. And in this window you can always see how much of which currency you have in Exchange/Margin Trading/Lending accounts.
These are the cryptocurrencies that currently support margin trading. You will see this when you enter Margin Trading section.
Before you start doing any trades you will have to research what is that you want to trade. And are you opening a short or long position.
I personally mostly use margin trading to open short positions and barely ever open any long positions. For this you will have to find a token that is overvalued at the moment and you think that price of it is going to fall. You will make your profits as the price is falling. Bigger the fall – bigger the profits.
For example, I think the Ethereum has grown enough after the recent downfall and I decide that I want to open short position. I go to sell Ethereum (in the Margin Trading section). And I'm able to sell 250% value of my collateral in Bitcoin worth of Ethereum. I know it sounds complicated, but I assure it's not.
What is actually happening when you do this?
You take a loan with as much Ethereum as you sold and you actually sell it. And when you close your position you buy the same amount Ethereum and return to the lender with interest. But you don't have to worry about any of this, because it is all automated and you just have to open and close your position. That's it!
Ok! When we sold Ethereum we opened our short position. The price of Ethereum has dropped and I want to take my profits now.
How do we close it now?
This box appears as soon as you opened any position long or short. And all you have to do, is close it to take your profits.
You are going to need a cryptocurrency that is expected grow. More price goes up – bigger the profits. Let's continue working with the same Ethereum example. But instead of selling we are gonna buy Ethereum. That way we open our long position in margin trading.
What is actually happening when you do this?
You also take a loan only this time it's not Ethereum that you are loaning but Bitcoin. And when you close your position, you sell Ethereum that you bought and return the Bitcoin loan to the lender.
But keep in mind whether you are placing short or long position, don't use maximum avaliable funds in your Margin Trading account. Because your predictions won't always be spot on and instead of expected price drop it can suddenly start rising. Or the price of currency that you used as colleteral is significantly droping. In these cases your margin is going to drop and as soon as it is under 20% your account will be liquidated. You can follow the numbers in this box.
Also I have to mention the loan rate of Bitcoin is much higher than any other cryptocurrency. This can be hundreds and even thousands of percent difference. For this reason short positions are used much more and brings more profits. You can check the rates for individual currencies in the Lending section.
Thanks for reading my post. I hope that you liked it and it was somewhat useful to you!
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