What is margin trading?

03 July 2023

Margin trading is a sophisticated financial market instrument that involves the use of borrowed funds to participate in trading in various assets. This mechanism expands trading opportunities by enabling participants to place orders for amounts exceeding the amount of collateral provided, known as "margin," by several times. The amount of this margin is determined by a parameter known as leverage.

Leverage is a measure of the ratio between margin and borrowed funds that are used when opening a trading position. It is a measure that allows you to see how much the borrowed amount can outperform your personal funds. To illustrate, imagine that you have 3 BTC in your account. With x5 leverage, you can trade the equivalent of 15 BTC. The amount of leverage is not fixed and can vary depending on the market - from 2:1 in the traditional stock market to an astronomical 100:1 in the volatile cryptocurrency market.

With the incredible speed of development of the digital world, special attention is being paid to the concepts that support it. One of them is margin trading in the field of cryptocurrencies. But what does it mean? What does it include? Let's solve this cryptographic mystery together.

margin trading

How does margin trading work?

Margin trading is an elegant strategy that allows cryptocurrency traders to operate with large volumes of assets without having to make a full deposit. Thus, buying 1,000 units of cryptocurrency at $10 per unit no longer requires you to have $10,000 in cash. With margin trading, you simply borrow most of this amount from your broker and execute the trade using only a fraction of the full value of the assets.

Types of margin and margin trading

At the heart of margin trading are two main types of margin: isolated and cross-margin. 

Isolated margin implies the availability of a separate, "isolated" account for each trading pair when opening a margin position. In this case, the liquidation of a position on one trading pair does not entail consequences for other open positions. A trader is given the opportunity to additionally replenish the balance with assets to minimize the risks of a Margin Call or position liquidation. The main advantage of this approach is protection against extreme market volatility.

In the case of cross-margin trading, all margin assets are collected in one common account. Here, the margin is set at a single level, and in case of liquidation, it is applied to all assets at once. Given the high volatility of the cryptocurrency market, there is a possibility of a complete loss of all funds in a trading account. However, despite this, cross-margin trading provides an opportunity to use profits from one pair to compensate for losses from another, which, in turn, can prevent Margin Call and liquidation of positions.

Types of margin and margin trading

Margin Call and position liquidation

Margin trading requires extra care, as rash actions can lead to losses instead of the expected profit. When a margin position becomes unprofitable and is in danger of being closed, the exchange warns the trader using the "margin call" message. This situation implies several possible actions:

  1. Reducing an open position until it is completely closed.
  2. Replenish the margin balance to remove the position from the "margin call" state.

To better illustrate this process (excluding trading commissions), let's imagine that the user has 2000 USDT on the margin balance. A position is opened for 1 BTC at a price of 10000 USDT using leverage x5. The initial guaranteed margin deposit in this case is 20% of 10000 USDT, i.e. 2000 USDT. If, taking into account losses, the total amount of margin balances expressed in USDT becomes less than 65% of the initial margin deposit, the user's position will be switched to the "margin call" state.

When losses on an open position reach a certain threshold, the position is automatically liquidated at the current market price. This process includes the return of the borrowed funds that were initially issued to open the position. For example, let's assume that the user has 2000 USDT on his/her margin balance and opened a long position for 1 BTC at a price of 10000 USDT using leverage x5.

If, taking into account losses, the total amount of margin balances expressed in USDT falls below the maintenance margin, the user's position will be forcibly closed or liquidated. The maintenance margin is defined as 50% of the initial margin deposit.

Margin Call and position liquidation

How to trade with margin?

The process of margin trading involves:

  1. Create an account for margin trading on the stock exchange.
  2. Choosing cryptocurrencies for trading.
  3. determining the margin level - how much of your funds you want to use as margin.
  4. Constant monitoring of your positions to calculate potential profits or losses.
Як торгувати з маржею

Advantages and disadvantages of margin trading

Margin trading, by its very nature, carries significant risks, which are amplified when it comes to cryptocurrency markets. Due to the high volatility of digital assets, traders need to be extra careful when using margin in their trading operations. Although hedging and risk management strategies can serve as effective tools to mitigate potential losses, margin trading is not recommended for those who are just starting out in the field of cryptocurrency trading.

As with every subtle maneuver in the financial market, margin trading in cryptocurrencies has its pros and cons, and applying this strategy correctly requires you to have a clear understanding of both sides of the coin.

Advantages of margin trading

The main benefit of margin trading is the ability to use leverage. This allows traders to open positions efficiently without having to deposit significant funds into their trading accounts. Another advantage is that traders can collateralize their positions using a large set of assets, which provides additional security for their trading positions.

Disadvantages of margin trading

Margin trading has no insurance against losses exceeding the trader's initial investment, which makes it a very risky trading strategy. Depending on the amount of leverage, even a slight decline in the market price can lead to significant losses.


Margin trading in cryptocurrencies is a complex and attractive tool at the same time. If you have the necessary knowledge and experience, it can become a powerful asset in your trading arsenal.

It should be remembered that the cryptocurrency market is known for its volatility, and margin trading can introduce additional risks.

Therefore, it is vital to trade consciously, closely monitor your positions, and immediately respond to changes in market conditions.

If you want to join the world of margin trading in cryptocurrencies, be sure to do thorough research, choose the right platform, and think about your risk management strategy.

Ultimately, successful margin trading requires a strategic approach, unwavering patience, and a clear understanding of the crypto market. I hope that this article has helped you decipher the main aspects of margin trading and prepare for new trading adventures in the world of cryptocurrencies.

Remember that every investment decision should be weighed and analyzed to minimize the likelihood of losses. Always keep in mind the principle of "high risk - high return" and conduct your trading activities in a deliberate and understanding manner.

Please note that all advice and information provided here is not investment advice. Always do your own research or consult a professional financial advisor before making investment decisions.

If you want to learn more about cryptocurrencies and get skills, experience and tools that you can immediately apply in the cryptocurrency market - sign up for trading courses at the CRYPTOLOGY trading school.

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