Risks of Margin Trading and How to Mitigate Them

When trading on margin, part of your position is given for you to trade, so long as you have collateral. Here, have listed some potential risks involved with Margin trading, as well as some steps to mitigate them. 

Trading on Margin

As stated before, margin lets you open positions that are up to 5 times more than your collateral value. If you allocate 1,000 EUR as collateral, you can open a position worth 5,000 EUR.

Your gains and losses will move 5 times faster, and due to the volatility of crypto, the positions could move quickly in a short timeframe. This puts more stress on the trader to remain aware of their positions, open orders, and the free margin they have.

If big sums are involved, you have to be ready to dedicate your time to properly analysing what your plan is and how to manage positions, to ensure security and risks are minimized.

If your active positions are in a net loss which results in your available margin dropping to 0% of your collateral value (this corresponds to a free margin of -70%), this will automatically close all your positions. This is called a stop-out or liquidation, this is why proper care and thought should be put into every margin position on the platform.

Tips to Mitigate Risk 

1. Set a Stop Loss or Take Profit

   The easiest way is to use a Stop Loss or Take Profit. A Stop Loss or Take Profit will automatically be triggered and close the position when the asset gets to the specified price; however, some slippage may occur on market/stop orders in fast-moving or illiquid markets.

   If you are not monitoring your positions 24/7, then using stops is advisable, even with the risk of slippage, especially if you're trading with leverage.

2. Have a Plan

   Having a plan means forward-thinking measures on what positions to invest in and when to:

   • Never trade what you are not willing to lose,

   • Have a target price for taking any profit or loss of a position,

   • Be aware of your losses and plan accordingly.

Price Warnings

Following our recent platform update, our effort to improve your trading experience is continuing with the introduction of a new Price Warning feature. The Slippage Warning Dialog is there to show you in real time if any of your orders could lose more than 3% due to slippage. This is an important component of your trading arsenal, as it will warn you immediately before confirming orders. Use this to your advantage, so you can be aware, act fast and stay on top of the markets.

The Price Warning Dialog shows up if the user submits an order which could lose more than 3% due to slippage. The mechanism works like this:

• No warning is shown when slippage is under 3.00%

• It shows a green warning from 3.00% to 4.99%

• It shows an orange warning from 5.00% to 9.99%

• It shows a red warning from 10.00%+

• The calculation takes the size of the order into account and adjusts the slippage warning percentage accordingly

• It will appear when placing a new market/limit order or editing an open order

• It will appear on both the Exchange and Margin platforms.

What it does not do:

• Take spread into account (for now)

• It will not appear when doubling or closing a % of Active Positions on Margin (for now).

Coinmetro’s Demo Platform is always available if you would like to practice without risk. Please note that this article is not to be seen as trading or financial advice. It is for educational purposes only.