Never trade with more you can afford to lose
You may have heard this a million times before, whether it relates to gambling or investing, but it is the most fundamental piece of advice relevant to leverage trading.
Leverage trading allows you to make money whether the price increases (by going “long” on a position), or if the prices decreases (by “shorting” the asset).
When trading with leverage you are stacking the odds against yourself that the market will move in your favour.
Depending on the amount of leverage you use, you will be liquidated (lose your entire stake) if the market moves a certain percentage against you.
The liquidation percentage is calculated by dividing 100 by the amount of leverage you choose to use.
Take the following example:
Crypto X is trading at $100.
You want to long $100 worth of Crypto X because you believe it will increase in price.
You can long Crypto X at $100 using 10x leverage. In this scenario, you only need to stake $10.
However, if the price moves 10% against you (drops to $90), you will lose 100% of your entire $10 stake (you will be liquidated).
Using the same example, you could short $100 worth of Crypto X with only $4 using 25% leverage. In this case if the price increases to $104 (4% increase), you will be liquidated.
ALWAYS use a Stop Loss
A Stop Loss allows you to set a predefined amount at which the platform will sell your entire, or a portion or your entire position if you are in a losing trade.
Take the above example again.
Crypto X is trading at $100 and I have longed $100 worth using 10x leverage, meaning I could potentially lose $10 if the asset drops to $90.
I can put a Stop Loss in place at $95 which will automatically trigger if the price reaches $95, meaning I will only lose $5.
A good rule of thumb is to only stake 1% of your trading account on any trade. Personally I tend stake 200% of my trading account using 10x leverage and a 10% Stop Loss from my entry point (meaning if the price hits my stop loss I lose 2% of my total trading kitty).
Generally, your trading platform will be so kind as to email you if you get liquidated (if you don’t use a stop loss). Take it from me, waking up and reading your emails to see “YOU HAVE BEEN LIQUIDATED” is something you can really do without.
Don’t use high amounts of leverage
As mentioned, I tend to stick to a maximum of 10% leverage when trading, giving me space for a 10% swing against me (which I don’t allow because I ALWAYS use a Stop Loss).
Some exchanges will allow up to 100x leverage which is the equivalent of taking all the cash out of your wallet and flushing it down the toilet.
The reason people do leverage trading is because similarly to the risk of being liquidated being amplified, so is the potential reward. Example:
Crypto X is trading at $100.
I long $100 using 10x leverage, meaning my position size is worth $1,000.
If Crypto X increases to $101 and I sell, I make $10 (10% return on investment from a 1% increase in the price).
The above example shows the potential for high gains when leverage trading, however I hope the above highlights the risks involved more.
My advice to all investors is to stay away from leverage trading altogether. Due to the volatility in the crypto market the swings can easily liquidate you or stop your position out even if the price subsequently hits your price target. However, if you are new to leverage trading and insist on diving in, use the above three strategies as a bare minimum to minimise your risk of loss.
I’m Jamie, 35 years old and living in Australia. I got into cryptocurrency in 2018 shortly before the $20k high and subsequent bear market, and when you could buy 1 ETH for $300 (my first investment). Since then I have dabbled in most things crypto-related: leverage trading, minting and selling NFT’s, ICO’s… I’ve been scammed (several times), attempted various trading strategies (from hodling to 100x’ing a trade) and introduced many people to crypto.