Traditional crypto exchanges let people make a deposit in BTC or another currency and purchase various cryptos. This model is good but there are certain limitations.
The main issues with traditional crypto exchanges are:
Security of your funds
Inability to take short positions
Lack of leverage
Benefits of access to leverage
There are certain exchanges, like Monfex, that offer perpetual futures contracts on cryptocurrencies. These contracts move dollar for dollar with the coins that they represent and have 2 key features:
They let you trade with leverage, meaning you only need to put up a fraction of the price of the coin that you want to trade.
They enable you to go long and short so that you can bet that a certain coin will drop in price.
The benefits of these features are:
You do not need to keep as much money in your account because you only need to put up a fraction of a coin’s price to enter your trade.
You can bet on down moves as well as up moves.
You can better take advantage of flat, non-volatile markets.
In this article, we will explain what leverage is and show you how to best use it to maximize your results when trading with Monfex.
What is leverage
Leverage is basically the financing provided by the broker that lets you trade bigger positions. In order to trade with leverage you put up a fraction of the amount you want to trade as collateral (typically known as margin) and the broker will lend you the rest.
This is beneficial for you because it allows you to put up less money to take bigger positions. And this is beneficial for the broker because you will trade more so they will make more commissions.
This may sound complex but it is all handled right on your user-friendly trading platform, and we will simplify all details and provide trade examples in this article.
How leverage works on Monfex
In order to demonstrate how leverage works let’s use a simple trade example.
Let’s say that you deposit 1 Bitcoin into an account that has 10X leverage available.
And let’s say that the market price of Bitcoin is $4,000 at the time of your trade.
If you think that BTC will appreciate relative to the US Dollar you can take a long position on BTC/USD.
Let’s say that you decide to trade 2 coins...
You simply select 2 as your position size on the Monfex platform.
Because you have 10X leverage the platform will automatically only allocate 10%, in this case, 0.2 BTC ($800), to this trade as margin.
Let’s say that you are correct, the price of BTC increases to $4,100 and you decide to exit your trade.
Because you traded 2 Bitcoins you will make a $200 profit.
Since all trades are settled in BTC on Monfex this will equate to $200/$4,100 = 0.0487 BTC.
Now let’s compare percent returns on leverage.
If you had no leverage you would need $8,000 to buy 2 BTC. If the price went up by $200 you would earn $200/$8,000 = 2.5% profit.
With 10X leverage you only put up $800 (calculated as $4000 * 2 * 10%) to enter your trade. So the same $200 profit equates to 25% return on equity ($200/$800).
That is the power of leverage.
Proper positions sizing and risk management
If improperly used leverage can be dangerous.
The key to dealing with leverage is using the proper risk management and position sizing.
Some crypto derivative exchanges allow users to select their desired leverage and/or margin.
Because simplicity is a core value, Monfex takes a more user-friendly approach.
You simply select the amount that you want to trade after leverage and the Monfex platform will automatically allocate the required margin to the trade.
For example if you decide you want to trade 1 Bitcoin at $4,000, and you have 10X available leverage the system will automatically allocate $400 (or 0.1 BTC) of margin to that trade.
This makes it easier and faster for you to select your desired trade size and get into your trades.
To make things even simpler, the upcoming version of The Monfex platform will actually show you the required margin for your trade. This way you won’t need to calculate anything.
Since you always have the maximum leverage at your disposal you should mitigate risk by controlling position size.
A good rule of thumb is never to risk more than 5% of your account balance on any one single trade. Using stop-loss orders on open positions will help limit your risk.
When entering a trade it is always a good idea to know the price at which you will cut your losses. This is the price where you will place your stop loss.
In order to calculate your max position size simply make sure that the amount you will lose based on your predetermined stop-loss price is always less than 5% of your account balance.
Let’s do a simple example.
If BTC is $4,000 and you have 0.25 BTC ($1,000) in your account you never want to risk more than 5% of $1,000 or $50 on any trade.
If your stop-loss is $100 away from your entry price than your position size should be $50 max single trade loss divided by $100 stop loss distance 0.5 BTC. this way if BTC does move $100 against you you will only lose $50 because you entered your trade with 0.5 BTC.
Predetermining your max loss on a trade and limiting your max single trade loss relative to your account balance is one of the most important rules to trading and should be used by all traders at all times.
Default leverage setting
Other exchanges offer leverage as high as 100X on cryptos. With the historic volatility on Bitcoin, we believe that it’s way too much. It’s a formula 1 car in a residential area.
We do however like nice and fast cars that can get you to your destination safely :)
Because of this, we default all Monfex accounts to 10X leverage. This should be more than enough. But in order to stay competitive, we allow users to switch to 50X leverage upon request.
In conclusion, if properly used leverage can take your trading to the next level. It does however have risks so be sure to use very strict risk management rules described in this article and the Monfex academy to protect your hard-earned money as much as possible.