Leveraged Trading

Leveraged trading refers to the practice of trading with borrowed money, with the expectation that after some time, the profits will be much larger than the cost of the borrowing. Usually, investors combine their borrowed money with a smaller portion of money or assets they own, called “margin,” which works as collateral security for the lender.

The difference between the investors’ own margin, and the borrowed amount, is called leverage ratio.

Leveraged trading involves “high-risk, high reward” investments, because it amplifies both good and bad results equally. If the price doesn't fluctuate as expected, traders will not only lose their own money, they will lose borrowed money and, as a consequence, they will get trapped in a debt that is larger than the amount borrowed (due to interest rates). On the contrary, if the price fluctuates as expected, the leveraged trader will get benefits without having a large amount of initial capital.

It is possible to engage in leverage trading on almost every centralized exchange (CEX) platform, including Binance, and decentralized exchange (DEX) platforms such as GMX, APEX, and PancakeSwap.

The mechanism is very simple:

To perform leveraged trading on an exchange platform, the investor will set a specific leverage ratio (for example, 10:1, which equals to x10). This means that the investment will be 10 times bigger. This ratio will automatically determine other 2 values:

Liquidation: for example 10 % - this means that if the asset loses 10 % of its value, the investor loses all the funds. More than 10 %, and the investor must pay.

Trading Fees: 1 % per each transaction.

For a single sale, the value of the price has to increase by at least twice as much as the trading fees. In this example, if the asset does not increase by at least 2% in value, the investor will still lose some money. As a consequence, selling at the same price will still cause the investor to lose.

PROs

• It allows more people to get into investment and speculation
• Greater returns on investment
• Increased market exposure
• Perfect for investors with low risk aversion

CONs

• It is an extremely risky way to trade
• Margin calls (an alert when a margin account runs low on funds)
• It produces a lot of speculation and has a massive impact on markets

Conclusion

In conclusion, leveraged trading is a type of investment strategy that involves borrowing money to increase the potential return of an investment. While it has the potential to deliver greater returns, it also comes with increased risk. Traders should carefully consider their investment goals, risk tolerance, and experience before entering into leveraged trading.

- Start with a solid understanding: before entering into leveraged trading, it is important to have a solid understanding of financial markets, investment strategies, and the associated risks
- Manage risk: traders should carefully manage their risk by setting stop-loss orders and regularly monitoring their positions
- Keep your emotions in check: emotional trading decisions can lead to costly mistakes - traders should remain disciplined and stick to their investment strategy