Understanding Leverage Trading and Its Benefits
What is leverage trading? If you go to any centralized exchange that offers leverage, you will be able to open a margin trading account. It allows you to access the market of derivatives and open short market positions. Essentially, the exchange or a brokerage service provider lends you money so that you can open a position which you otherwise wouldn’t be able to afford.
Leverage can be used for various purposes. Here are some examples:
- Shorting assets. If you believe that a certain asset will fall in price in the nearest future, you could simply create a short position. To do so, you will need to borrow the assets from a party willing to lend you them. If the price falls, you can buy the assets back and return borrowed funds while pocketing the difference. To make this deal profitable, you have to borrow the assets and use leverage.
- Increasing position size. You may use borrowed funds to increase the size of any market position and, correspondingly, your profits. As in case with any lease, you will have to pay interest on the loan. Keeping a position open for long time may result in significant fees and lower returns than expected.
- Trading derivatives. Futures and options often require you to use leverage since you often need to purchase a certain amount of assets to open a position. Even the slightest move of the price will result in significant profits or losses. While it is possible to trade without utilizing leverage, the capital requirement alone makes it unfeasible for the vast majority of individual retail traders.
The benefits of leverage trading are quite apparent. You don’t need a large portfolio and can benefit from trading on the derivatives market without any issues. However, there are downsides to taking on a loan, paying interest, and suffering losses on any position. The concept of leveraged trading explained in short is to borrow funds to increase both potential profits and losses.
The Basics of Leverage Trading on WunderTrading Platform
The WunderTrading platform can connect to several popular centralized exchanges and create leveraged market positions on your behalf. While it is possible to use bots on the spot market, they usually generate the most value by trading on the futures market (especially with the addition of AI bots) or by opening both long and short positions when required.
Let’s talk about how to trade with leverage on the WunderTrading platform. The process is quite simple:
1. Go to the WunderTrading website and log in.
2. If it is your first visit, you will be prompted to connect an account.
3. Go to the exchange and obtain an API key for your margin trading account.
4. Use it to connect your margin trading account to the WunderTrading app.
5. When creating new bots, specify the margin account in settings.
6. Now, bots will trade using leverage provided by the exchange.
The WunderTrading platform has multiple preset bots that can utilize the power of leverage quite effectively. The AI bot uses the sophisticated statistical arbitrage system to build a diverse portfolio including futures, positions on the spot market, long and short leveraged positions, etc. You can also try launching a GRID bot on your margin trading account.
Note that the WunderTrading platform will receive access to your margin account and will trade without any limitations. You need to carefully select the right settings for your bots to ensure that they do not place orders that may compromise your portfolio.
Risk Management Strategies for Successful Leverage Trading
Since all leveraged market positions are created with debt and often multiply both profits and losses, it is hugely important to use various risk management strategies for leveraged trades. It is imperative to employ a wide variety of approaches to reduce the exposure of your portfolio to risks associated with utilizing debt as the main way of financing your trading activities.
Here are some ways of managing risk in leverage trading:
- Use delayed orders. Stop-loss and take-profit orders are designed to make your trading activities as consistent as possible. Stop-loss orders protect you from incurring unsustainable losses. Take-profits make it easier to set profitability goals and close positions optimally. While it is possible to manually trade without delayed orders, they are essential for people who use bots.
- Limit the funds available to bots. When minimizing losses in leverage trading performed by an automated trading system, the simplest yet most effective approach is to limit the portion of the portfolio that bots can use to trade. Many experts suggest limiting any asset class to roughly 15% of the total value of your portfolio. However, it is just a vague guideline. Some managers put over 50% in specific assets or investment opportunities.
- Use lower leverage multiplier. While some centralized exchanges allow their users to use up to 100x leverage, you should always remember that you will receive 100x profits, but also incur 100x losses. It is a good idea to reduce the multiplier and allow bots to deliver profits with consistency instead of relying on a couple of lucky trades.
- Reduce the number of simultaneously active positions. You can adjust the amount of orders that any bot can place on your behalf. It is a good idea to keep the number of concurrent positions low at first and gradually increase it as you gain more experience and get comfortable with running bots on your margin trading account.
Tips and Best Practices for Effective Leverage Trading on WunderTrading
The best practices for leveraging trades on the WunderTrading platform can be summarized in several key points:
- Do not rely only on leverage. Some retail traders go all in on their margin trading accounts exposing themselves to unnecessarily high risks instead of spreading their capital across multiple different investment opportunities. We highly recommend putting only a small amount of assets in the margin trading account and focusing on the spot market and long-term holding.
- Use the backtesting functionality. When it comes to maximizing profits in leveraged trades, the best way is to have as many good trades as possible. The best way of increasing winrates is by testing your strategies vigorously and creating a system that produces more true positives than false. Use the Strategy Tester on TradingView and the backtesting feature on WunderTrading to build a consistently performing trading bot.
- Control position sizes. It is a good idea to keep position sizes relatively small or estimate them using standard approaches like Average True Range position-sizing and bankrolling techniques. In some cases, setting max size in absolute units can be a better solution.
These tips for successful leverage trading will help you avoid unnecessary risks and huge losses. Remember that the key to success is not luck, it is consistency.
Understanding Margin Calls and Liquidation in Leverage Trading
What are margin calls in leveraged trades? When you borrow money, any lender would like to receive collateral. In our case, you have to put a certain percentage of equity on the table upfront. The balance of your margin account represents the total equity that can be used to service your debt when necessary.
When a leveraged position goes in the wrong direction, you need more and more equity to cover the debt. A margin call occurs when the lender demands you to add more funds to keep a market position open. Otherwise, the position is closed forcefully and lenders are reimbursed with funds from the margin account.
The liquidation process in leverage trading is fully automatic. When there are no funds in the margin account, a position is liquidated at the current price of the asset and funds are returned to the lenders with the difference between the entry and exit prices covered from collateral.
How to avoid margin calls and liquidation? There are three ways to do so:
1. Add more funds to the margin account to keep all market positions open.
2. Manually close leveraged positions when they approach the threshold for a margin call.
3. Open an opposite market position and add more funds to cover the difference.
The latter technique is used only when have sufficient funds and can cover the difference between entry prices. It should be the last measure to use as it creates additional risks and can lead to a situation where both positions incur losses.
The Pros and Cons of Leverage Trading: Is it Right for You?
Many experts believe that leveraged trading should not be used by inexperienced retail traders. Margin trading is often advertised as a way to quickly make money in financial markets. However, such advertisements rarely talk about the risks associated with taking on loans when trading in financial markets.
Remember that all cryptocurrencies are inherently speculative assets. You cannot use traditional fundamental approaches and analyze them from the perspective of real assets, brand value, product value, etc. The sheer strength of economic uncertainty makes every leveraged position a risky endeavor that should be taken very seriously.
Let’s talk about the pros and cons of leveraging trades. Here are some upsides of using leverage:
- Accessing the derivatives market;
- Trading with a higher rate of return;
- The ability to create short positions.
Downsides of using leverage:
- Losses are notably amplified;
- You need to pay fees for borrowing;
- Margin call is a big issue.
Another important factor is that advantages and disadvantages of leverage trading on WunderTrading platform may be less apparent to newcomers. Whether you want to copy trade crypto or plan to use automated trading systems to empower one of your technical analysis strategies, you should take both pros and cons of margin trading with bots into consideration.
Ultimately, the decision to trade while using leverage is yours to make. We recommend learning more about the terms and conditions of using leverage on the exchange of your choice and thinking through every decision as it will affect your portfolio drastically.