How to Use Leverage in Crypto Trading (Without Getting Wrecked)
The most effective instrument in any crypto trade is leverage. It enables you to buy on margin you do not really possess. As much as it has the capability of raking in huge profits, it can equally come to fetch huge losses in case of irresponsibility. As a matter of fact, most traders, particularly novices lose everything due to the improper application of leverage. When people say that somebody was wrecked they mean it. In this write up, I would define the meaning of leverage, how it is used in crypto and how to be safe operating leverage, particularly as a Nigerian who might be operating with small capital.
Leverage is merely a borrowing from the exchange and trading with a larger amount. Suppose there is $100 in your cryptocurrency exchange account. Suppose you are leveraged 10x it would imply that you are now trading $1K. Your deposit equals your 100 and the exchange loans you the 900 minus. Now should the price move your way it knocks up a profit of 10 times the amount of a short without leverage. However you could easily lose your 100 dollars when the market turn against you. The exchange will cover their money by closing your trade when your loss is too large. This is referred to as liquidation.
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Leverage attracts many Nigerians due to the fact that it appears to be a simple means to multiply the small capital. You can read on Twitter or Telegram some people saying they made $500 out of $50 within a couple of hours by using 20x leverages. That is thrilling, and it might leave you feeling that you are missing out. However, what you do not know is that with every individual who wins big, there are several individuals who end up losing it all. As a matter of fact, it is quite dangerous to trade such high leverage, particularly, in such a rapidly developing market as crypto.
What are the reasons, then, why people combine leverage, especially when it is risky? This is primarily because it will enable them to reap more profit on marginal shifts in the market. See, meaning that say Bitcoin goes up 1% and you are levered 10x up, you will capture 10%. and with no leverage you will only get 1%. In addition, individuals with small capital in trading borrow money to trade at large. When you have a set amount of money you are trading with, say $20 leverage can make you think you are trading with $200+. This will provide you an opportunity to make more money and there is a higher probability of losing more quickly.
It is quite essential to understand how to use leverage sensibly because of this threat. The initial thing is to begin small. As a new trader in the crypto, it is best not to jump into 10x or 20x leverage. Initial leverage ratio to begin with is either 2x or 3x. That allows you to experiment and to fail without learning everything and missing out too quickly. Increase it slowly as you become better and it must always be cautiously. Higher leverage is not always used even by professional traders.
The next tip that is important is about using stop loss all the time. A stop loss is a sort of safety net that allows your trade to automatically shut down the position once the price goes too far in the opposite direction. An example is, when you make purchase of Ethereum at $ 2,000 and then you have set up stop loss of $ 1,950 then you are buying at a point where the price has kept downwards at $ 1,950, then you will make the sale, your trade will realize the loss of value. This makes you save yourself the larger losses. It is like driving a car with no brakes at all: this is very risky trading leverages without the stop loss.
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Nor should you ever risk on a single piece of business all your funds. This is the error into which a beginner falls in many cases. When you have 100 dollars, do not put all of this money in the pool and then one leveraged trade. Spend perhaps $10 or $20 and save the balance. That way you can lose at least you have money to give it another shot. This is what is referred to as risk management, which is amongst the most critical things in trading. The trader number one job is not to make a huge profit but to preserve his capital.
Your liquidation price is something you should calculate prior to entering into any leveraged trade. It is the price you can expect the exchange to attack and vigorously close your position. The more leverage you employ, the more liquidated price that will be closer to the entry price. Using an example, when you trade with a 50x leverage at a price of $1,000, a move of only 1 percent, can liquidate you. However with 2x leverage the price must fall a lot further before it is liquidated. In such a way, the condition of having low leverage enables you to have a larger margin to manoeuvre through the market moves.
Revenge trading should also be avoided. This occurs when you run a trade which you lose and then rush back to another trade in an attempt at reclaiming what you lost. This ends up causing even greater losses most of the times. Taking a break when you lose in a trade is a good way to go. Considerations of what went wrong. Research on the market once more. Do not make your decisions based on emotions. Crypto trading needs a clear and composed mind.
Be cautious in taking social media craze. What you may notice is that people share screenshots of the huge profits where the used leverage is 100x. What they are not going to tell you is the number of times they were liquidated. Blindly imitating someone is not good. Make your own research. Know your purpose in going into a trade. Make yourself ask: What is my plan? How dangerous am I? My stop loss where is it? What do I take profit?” Ask yourself these questions and if you can not divulge the answers clearly then do not make the trade.
The other aspect that can assist you is learning how to read basic charts. It is not required that you become an expert but you should be aware of such simple concepts as support, resistance, trend lines, and candlestick patterns. With these tools you get to see whether a coin will increase or decrease. Trading without understanding the chart is same as going to drive blindly.
Trade on borrowed money should also never be done. Stop taking loans off friends, family and do not use your school fees or house rent to invest in crypto. Take money you can afford to lose. It is highly unpredictable in the crypto market. Anything may occur. And the market may hold against you when you do everything right. Therefore, just play safe.
Yet, do not jump to leverage trading just yet, even when you finally become familiar with it all, as your first attempts should be done with a demo account or small amounts. There are numerous platforms that provide demo or testnet account to trade using some fake currency of money. This makes you learn without risking at all. This is your time to learn how leverage, how the stop loss works and the way coins are moving.
Summing up, leverage is not bad it is a tool. It will grow your capital in case you know how to use it. However, when you do not know it, it may ruin your account fast. As a Nigerian, I am aware of the effect of the urge to want to get money quickly. Trading, however, is nothing like gambling. It requires Patience, Punishment and Enlightenment. Leverage, guard your capital, have risk management and never stop learning. That is the leveraging in crypto trading not destroying yourself.