Margin Trading Guide: How to Amplify Returns and Risks with Borrowed Funds

Quick Overview

Leverage trading (кредитное плечо в трейдинге) is a powerful but risky tool in cryptocurrency trading. It allows traders to control larger positions with relatively little capital. For example, with 10x leverage, you only need $1,000 to operate a $10,000 position. This looks enticing—profits can double, but losses can also double. Traders commonly use it for futures trading and margin trading, especially on volatile assets like Bitcoin (BTC) and Ethereum (ETH).

Core Mechanism of Leverage Trading

Borrowing funds to amplify position size

The essence of leveraged trading is quite simple: you borrow money from the exchange to amplify the size of your trades. This is usually expressed in ratios, such as 5x, 10x, 20x, etc., indicating the multiple by which your initial capital is magnified. Assuming you have $100 in your account, using 10x leverage allows you to trade with a size of $1000.

This method is mainly applied in two areas: futures contract trading and margin trading. The working principles of both are basically the same, with the difference being that the former is in the form of contracts, while the latter involves borrowing coins directly for spot trading.

Initial Margin: Opening Threshold

To open a leveraged position, you must first deposit a sum of money in your account as collateral—this is the initial margin. Its size directly depends on the leverage ratio and the position size.

The calculation is straightforward: suppose you want to buy ETH worth $1000 with 10x leverage, you need to provide $100 as collateral. If the leverage is changed to 20x, the collateral drops to $50. Does it sound like higher leverage is better? Wrong. High leverage means a higher liquidation risk.

Maintenance Margin: The Dam to Prevent Liquidation

Having only the initial margin is not enough. When the market moves against you, the margin in your account decreases accordingly. Once the margin falls below the maintenance margin level (поддерживающая маржа), you must immediately add funds, otherwise, your position will be forcibly liquidated.

In simple terms: the initial margin is opening a door, while the maintenance margin is the condition that allows you to continue standing inside that door.

Leverage Trading Practical Case

Long Position: Bet on the price of the coin rising

Imagine you believe Bitcoin is going to rise. Decide to open a long position of $10,000 with 10x leverage, only needing to put in $1,000 as margin.

Optimistic Scenario: BTC rises by 20%, your position value becomes $12,000, and after removing the margin, you net a profit of $2,000 (ignoring transaction fees). Compared to the $200 profit from non-leveraged trading, the return has increased tenfold.

Pessimistic Scenario: BTC drops by 20%, resulting in a loss of $2000 on your position. However, your margin is only $1000, so your account is wiped out immediately. Even with a smaller drop, such as just 10%, the position may still be forcibly liquidated due to margin maintenance requirements. If you do not replenish the margin in time, the loss becomes irretrievable.

Short Position: Betting on a decline in coin price

Reverse operations can also work. When trading on margin, you can borrow BTC and immediately sell it, betting that it will drop. Assuming the current BTC price is $40,000, by borrowing 0.25 BTC and selling it, you would receive $10,000, using 10x leverage.

If BTC drops to 32,000 US dollars: You can buy back 0.25 BTC with 8,000 US dollars, returning the borrowed coins and profiting 2,000 US dollars (after deducting fees).

If BTC rises to 48000 USD: It will require 12000 USD to buy back the borrowed coins, but the account only has 1000 USD in maintenance margin, which will inevitably trigger liquidation.

Why Traders Choose Leverage

Do bigger business with less money

The most direct reason is small bets for big gains. Investing $1,000 can allow you to operate a position of $10,000, and if the judgment is correct, the return rate will multiply.

Improve capital utilization efficiency

Another angle is capital utilization rate. Instead of locking all the money in a 2x leveraged position, it is better to use a higher leverage to invest only a portion of the funds, leaving the rest available for other trades, staking, or liquidity mining. This offers greater flexibility.

Risk Management System for Margin Trading

Why is high leverage more likely to lead to liquidation?

The higher the leverage multiplier, the lower the tolerance for price fluctuations. When using 100x leverage, a mere 1% reverse price movement can put your position at risk of liquidation. This is particularly dangerous for the crypto market, where volatility is already high.

Many exchanges limit the initial leverage multiple to protect beginners, which is a wise move.

Two major risk protection tools

Stop-Loss Order (стоп-лосс): Set a trigger price for losses, which will automatically close the position when the price is reached. For example, if a long position is opened and the stop-loss is set at $9000, when the coin price drops to this level, the position will automatically sell, limiting the loss to an acceptable range.

Take Profit Order (тейк-профит): Reverse operation, set a profit target price. Automatically close the position after earning the expected amount to lock in profits.

Using these two tools in conjunction can effectively prevent excessive losses and excessive greed.

The importance of position monitoring ###

Don't assume that setting risk tools means everything is fine. During extreme market volatility (especially in the cryptocurrency sector), even stop-loss orders may be skipped. You must actively monitor your position status and be ready to manually adjust at any time.

Core Advice for Margin Trading

First: Start with low multiples. Even if you can open a 20x leverage, first use 3-5x to familiarize yourself with the mechanism.

Second: Always set a stop loss. This is the final line of defense.

Third: Only use money that you can afford to lose. Leverage amplifies everything, including your mistakes.

Fourth: Understand how the settlement price is calculated, and know where your bottom line is.

Fifth: Regularly review failed trades, identify patterns, and continuously optimize strategies.

Summary

Leverage in trading is a double-edged sword. In the high volatility environment of the cryptocurrency market, it can amplify gains but also quickly wipe out accounts. A fatal mistake for beginners is often being attracted by high leverage while ignoring the risks behind it. Successful traders are not successful because they are bold, but because they have a strong risk awareness. Leveraged trading requires not only the ability to judge market conditions but also strict risk discipline. If you have not fully mastered how leverage works, then wait and don't rush to use real money. Practicing repeatedly on a demo account until you fully understand is the right approach.