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How does leveraged trading work?

Leverage is essentially borrowed funds that increase a trader’s position size and its market exposure, thus its profitability. The fund you deposit (also called margins) is only a small part of the total transaction value, most funds are borrowed from the platform. The ratio of your position size and margin is the leverage ratio. Most leverage tradings are used in Financial derivatives, which means you can get the profit from the value of underly asset, rather than owning the asset itself.

No leverage

Using leverage

Pros of leverage

If you understand how to use leverage, it will be a powerful trading tool. The following are several benefits of leverage:

Amplify profits: You only need to deposit a small portion of funds and you can get the same profit as a regular transaction. Due to the profit is calculated based on the total value of your position, the margin can make larger profits, but on the contrary it can also cause multiple losses. 

Leverage opportunities: Using leverage just need less funds so you can release to more funds to do other  transactions. You get opportunities to use your funds effectively.

Short the market: You can trade according to market trends by using leverage. You can not only buy long but also short selling to make profits.  

Trade 24/7: You can trade cryptocurrency 24hours a day—365days a year. There is no centralized marketplace that opens and closes at a certain time. Therefore, you can trade whenever you want. This also implies there are more opportunities to enter positions and gain profit.

Cons of leverage

Although using leverage can make you lager profits, you still have to know its potential risks. The following are the potential risks:  

Amplify the loss: Margin trading can not only amplify profits, but also the potential for loss is also greater. Due to your initial funds are relatively smaller than regular transactions, it’s easy to forget the risk base capital you have undertaken. Although your loss will not exceed the deposit in your account, you should measure the full value of your own transactions and the potential adverse consequences, and take measures to manage risk.

Margin call: A margin call occurs when the value of your margin account falls below the platform’s required amount. You need to deposit more money in the account or close your position to reduce your total risk exposure.