With Binance, there are many trading possibilities. Margin trading, for example, allows users to trade cryptocurrencies with leverage, which can significantly affect their profits or losses. Since this is a sensitive tool that should be used with caution, it is advisable to do your research before making your first investment.
Fortunately, this article offers all the necessary information you need to know. Starting with the basics, we will explain what leverage is, when it is used, and how to use it. The dangers of high leverage will also be discussed, along with what leveraged tokens are and more. Without further ado, let’s pe in.
Introduction to leverage
Leverage is a crucial tool in most traditional and crypto markets. It offers traders better capital efficiency as they are not required to lock up all their capital. By combining options and futures, leverage helps bring liquidity to the market.
So how does leverage work?
This tool is part of margin trading, a combination of spot and futures trading methods in which investors trade cryptocurrencies with leverage. Just like spot trading, where an asset can be bought or sold directly, margin also involves an instant exchange of crypto assets. However, the difference is that you can incorporate leverage into trades and multiply their value by two to ten times, as futures contracts allow.
To use leveraged funds, you must invest collateral (margin) and choose the desired leverage.
It is important to exercise leverage with caution, as this action can increase potential risks and returns. If you leverage too much or misuse the tool, you are likely to fail as a trader. To prevent your mistakes from wiping out your capital, it’s best not to get too leveraged. Cryptocurrencies can be volatile and unpredictable, and you can reduce your chances of success in any type of trading, including Binance.
Here’s how to start marginal trading on Binance:
- Navigate to the Margin Account page on Binance and choose “Transfer” to transfer your assets.
- Click “Borrow” in the margin account to start borrowing and confirm your asset.
- Go to “Margin Trading” to start trading on margin.
- Click “Pay” to pay your loans.
When is leverage used?
In margin trading, leverage can be used in many cases. The most popular use is for hedging against an asset or portfolio. This action involves the creation of new positions that have a negative correlation with your existing positions. This way guarantees the mitigation of potential losses.
How does high leverage affect trading?
Leverage amplifies losses and transaction costs. If you deposit 500 USDT into your futures wallet and open 100x leverage with that deposit, you will get a total exposure of 50,000 USDT (500×100). Once you factor in the 0.04% taker fee, it will cost you 20 USDT to open this position. This translates to 4% of the bill.
If your position goes wrong, you will lose 4% of your account capital. This, in turn, increases your effective leverage. When you trade perpetual contracts, you will incur fees that are charged every eight hours, costing you an additional 20 USDT each day.
It is crucial to consider this cost associated with using high leverage.
Use of the responsible trading program
Binance has a unique responsible trading program that educates traders about the potential dangers of trading. If you are new to leveraging, there are quizzes and training videos available after registering to learn more about these dangers.
The platform has also limited the maximum leverage for new traders (20x) for accounts that are less than 60 days old.
Using leveraged tokens
Binance introduced leveraged tokens to provide leveraged exposure to assets. These tokens can be traded on the spot market much like other tokens, where each commodity refers to a basket of perpetual contract positions. The price of the leveraged token depends on the price change in the perpetual contracts market, which moves the leverage levels up and down.
Unlike margin trading, you can gain exposure to leveraged positions without putting up collateral. This allows you to maintain a good level of margin without worrying about liquidation risk. However, certain risks still exist, including the effects of price movement in the perpetual contracts market, funding rates and premiums.
Please note that you cannot withdraw leveraged tokens from Binance. Instead, you can store them in your Binance account.
How to use the correct leverage
The most important tip when using leverage on Binance is to not use the maximum available leverage out of habit. Use it when you need additional flexibility, but try to opt for lower amounts in your daily trading experience.
The following are some generally recognized guidelines before choosing a degree of leverage:
- Keep leverage levels low.
- Protect your capital and reduce downside by using stop orders. These are orders that work by determining a specific sum above which you may or may not buy or sell more.
- For each position taken, limit your capital to 1-2% of your total trading capital.
The ideal is to use the amount that suits you best. If you are just starting out, it is best to use 2x or 5x leverage.
Generally, the appropriate amount can be determined based on your experience, comfort levels, and risk tolerance in trading the crypto market. As a beginner, it makes sense to be careful since you are just starting to learn how to trade.
Important note: This post is intended for reference purposes only. Any such information does not represent advice or recommendations that any strategy is suitable for a specific user. If you are still unsure about leverage in margin trading, seek professional advice.
Using Leverage on Binance: Key Takeaway
Whether you are a beginner or an experienced trader, it is important to apply leverage with caution. The higher the leverage, the greater the potential dangers. Additionally, the taker fee and other expenses make excessive leverage too risky. Responsible trading is key to trading success.
Fortunately, Binance has a dedicated program to teach new traders how to use margin trading and has imposed limits on the amount of leverage you can use if you have a new account. You can also use leveraged tokens to minimize liquidation risks.
How much leverage do you think is right for you? What could happen if you exceeded that limit? Share your thoughts in the comments section below.
