Leveraged Trading

First of all, margin trading is a lot more difficult than regular exchange trading because there are more costs involved. Most people treat margin trading as a short-term strategy. If you hit it right, you really can make a lot more money than if just trade on the exchange.

And that’s true. When the timing is correct – there is a right time to borrow money in order to make more money. That’s what this margin trading lets you do. It’s fantastic on Poloniex, BitMEX, Bitfinex and others because you can margin trade so many different markets.

There are three different sections in Poloniex:

* the exchange section
* the margin trading section and
* the lending area

And you actually have three different wallets inside Poloniex as well; you have

* the exchange wallet
* the margin trading wallet and
* the lending wallet

…one for each different currency that has a margin trading market.

You can use any one of these different currencies as collateral to fund your margin trading.

As an example, I moved XMR from my exchange wallet over to my margin trading wallet – and now I can do margin trading. I have money in the margin trading area that I can use as collateral for picking up a loan to finance my margin traded position.

There are 11 margin trading markets on Poloniex that we can trade. The lending market works together with the margin trading market. We can ‘go long’ or we can ‘go short’, using our collateral to borrow from the lending market in order to take a position with 2.5x leverage.

If we ‘go long’ we are going to make money when the prices go up, and if we ‘go short’, we will make money as the prices go down.

A margin trader takes 2.5 times leverage trades on Poloniex, which means you’re borrowing money and to take your position. This is why you are charged the trading fee when you put on the position order and not when trade order is filled.

The other side of the margin trading market, is the lending market – where people put up their coin for traders to borrow and do a margin trade. If you’re ‘going long’ in any one of these 11 markets, the system automatically borrows bitcoin loans to buy the currency from the exchange to fill your long position.

If you’re going short in any one of these markets the system automatically borrows the matching currency and sells those coins on the exchange to fill your short position. For example if you were to ‘go short’ in bitshares, the system would borrow bitshares at the going interest rates. Similarly, if you were to ‘go short’ in maidsafe, it would use maidsafe to finance your short position and you would pay the maidsafe lending rates in your short position.

When I close my short position, the system buys the coin back from the exchange market, then it pays back the loan with interest. My collateral in my margin wallets is released, plus my profits or minus my losses.

However if you ‘went long’ in bitshares or in maidsafe, Poloniex uses the bitcoin lending market to finance your long position and so you pay the bitcoin lending rate to finance your long positions. When I close my long position, the system sells my coin back to the exchange market, then it pays back the Bitcoin loan with interest, and after that, my collateral in my margin wallets is returned, plus my profits or minus my losses.

This way, lenders get paid their interest first – assuring a nearly risk-free earning vehicle.

When margin trading, monitor the current lending rate for each of the markets you are trading. Sometimes lending rates can spike to extreme levels that makes profitable margin trading difficult.

Margin trading is very risky. However, margin lending is a safe and certain opportunity for lenders.

Aside from the background information about how the margin trading leverage works on Poloniex, BitMEX and others, it is vital to know about the risk of ‘forced liquidation’, or ‘Margin Call’.

Force liquidation only occurs when the position moves so far against you that the system automatically sells your holdings at the market in order to ensure that your Margin Loans can be paid back to those in the Margin Lending markets.

All I’m going to say about forced liquidation… after reading this book – it is expected that you know Rule Number One and Rule Number Two as taught by Phantom of The Pits.

Trading with these risk control rules, you’ll never face the nasty losses and demoralizing effects of hitting a Forced Liquidation.

(Read about Forced Liquidation on BitMEX, Bitfinex and Poloniex)