The digital currency industry continues to attract interest from institutions, as well as the average daily trader. The often wild price swings that cryptos can experience is one of the main reasons why people choose to trade them, as it has been for quite a while now, alongside the ability to get involved in a relatively new sector, with the potential to expand over the years.
However, volatile prices mean valuations can go either way. This can be an ideal environment for leveraged trading, but it can also be very risky. As of late, Bitcoin, Ether, and other tokens are under selling pressure, so if you are a beginner, there are several core principles you need to understand before applying leverage to your trading strategy.
What is leverage?
First and foremost, leverage is a feature which allows you to increase position sizing. When you hold a brokerage account, based on the deposited funds, you are able to basically borrow liquidity and place larger trades on the open market.
On one hand, this is one of the main driving forces behind online trading and the democratization of the markets – it is now possible to get involved even with limited funding. Over the past few years, brokers included cryptocurrencies in their instruments list and now their customers can buy or sell crypto derivatives, just like they do with traditional assets. In that sense, leverage on crypto is no different than on other assets.
Cryptocurrencies and leveraged trading
However, traders need to know that in the field of digital assets, leverage can be a completely different venture. Although accessibility has increased and trading on smartphones allows more flexibility, leveraged crypto trading carries a higher level of risk.
As these instruments post large intra-day price swings, you should adopt a responsible approach if you want to apply leverage here. That can be achieved by using a rules-based decision-making system, trading in line with risk management principles. For example, you should place a stop loss on every trade, allocate a small portion of the account to crypto, diversify assets, and more.
Experts view leverage as a “double-edged sword”, which means it can either work for you or against you. It has the ability to amplify gains and losses, and that’s why a conservative approach is more responsible at first.
For whom is it suited?
You don’t need a degree to trade cryptocurrencies, yet be aware that this is a challenging market. Generally speaking, traders with a higher risk appetite are suited for crypto trading. However, if you can’t tolerate large account swings, it would be better to start off small and gradually increase exposure as you achieve consistency and become more confident.
The ability to filter out media noise is also important. Last year, many experts predicted Bitcoin would reach $100,000. That prophecy failed to materialize and now the largest cryptocurrency trades about 50% below the all-time highs. You should be confident in your system and not influenced by subjective opinions.
After putting the pros and cons on the balance, we can say that the cryptocurrency market is a potentially beneficial area for short-term speculation. Still, only with a deep understanding of the industry and solid trading rules, traders can garner success in the long run. Leverage, in that sense, is no different and should be used carefully and methodically. Thankfully, there’s plenty of information in the online world for you to learn from.