What is leveraged trading?
Leveraged trading allows traders to potentially amplify their returns by using leverage, or borrowed funds, to trade cryptocurrency. However, it also comes with a higher level of risk, as the potential for loss is magnified by the use of leverage. In order to protect your invested capital, it is important to understand the mechanics of leveraged trading and how to manage risk effectively.
One of the key considerations in leveraged trading is the amount of leverage that you use. Using leverage increases the size of a trade and allows you to potentially generate larger profits from price movements. However, it is vital to understand that while leverage allows you to increase your potential gains, it also increases the risk of potential losses.
The content below will cover the main aspects of leveraged trading and provide you with the knowledge of how to manage the associated risks. Because leveraged trading comes with a high level of risk, it is necessary to understand these features so that you can manage your trade positions and use leverage responsibly. Again, leveraged trading is high-risk and is only suitable for knowledgeable traders who understand the risk.
Here are some key terms and scenarios that you should be familiar with when it comes to leveraged trading:
How do I access leveraged trading on Independent Reserve?
You can access leveraged trading from the Leveraged Trading tab on the Trade screen on the Independent Reserve web portal.
Before you can begin leveraged trading on Independent Reserve, you first need to pass a suitability test to determine whether it is appropriate for you.
The information on this page and the leveraged trading terms and conditions provide an overview of how leveraged trading works and the risks involved. Read this information carefully in preparation for taking the suitability test.
The Terms and Conditions and this blog page content contains the answers to the random multiple-choice questions you will be asked in the suitability test. You must receive an 80% score on the test by answering all questions correctly before you can access the leveraged trading feature.
When you are confident that you have a good understanding of the content in the Terms and Conditions and this blog, you can proceed to take the suitability test.
What is the maximum leverage that I can use on Independent Reserve?
The maximum leverage that you can use when creating a new leveraged position on Independent Reserve is 5x. For example, for every $1 you provide as collateral, we will advance you an additional $4.
Trading using 5x leverage carries a significantly higher level of risk than using 2x leverage. While it can lead to greater profits, the risk of losses is also amplified if the market moves against your position. It is essential to understand these risks thoroughly before engaging in 5x leveraged trading.
Understanding the risks of Leveraged Trading
Leveraged trading can lead to higher profits on market movements in your favour, but it also carries the risk of greater losses on market movements against your position. Using leverage to trade carries a high level of risk, so it is essential to exercise caution.
Key takeaway:
It is possible to lose your collateral when leveraged trading, even if you are an experienced trader. Please be responsible and only put in the amount you are prepared to lose if the market does not move in your favour.
How does extreme market volatility affect leveraged trading?
Sudden price movements can significantly increase the risk of losses when trading using leverage. This is why it is important for traders to carefully monitor their positions and adjust their strategies accordingly when market volatility is high.
If the market moves against your position, it can lead to margin calls and potentially even liquidation if the losses are too great. If you are unable to post additional collateral, your position may be subject to mandatory liquidation at the best price available in the current market conditions.
Key takeaway:
Leveraged trading is high-risk and should be approached with caution. In extreme market circumstances, you could lose all of your posted margin, plus incur additional losses.
How does a stop loss work on a leveraged buy or sell in times of extreme market volatility?
A stop loss is a feature that you can set on your leveraged position that can automatically close your position if the market moves in the wrong direction. It is essential to understand how a stop loss works so that you can effectively manage your trade risk.
You have the option to set a stop loss, which will automatically close your position at the best market price once your specified loss amount is reached. Alternatively, you can set a stop loss by specifying a market price at which the stop loss will be activated, attempting to close your position at the best available market price. It’s important to note that the stop loss serves as a trigger point, and in both cases, whether based on specified loss amount or market price, there is no guarantee that your position will close precisely at that desired PnL or market price.
Market volatility can result in significant losses, even if you have set a stop loss in place.
Key takeaway:
In times of high market volatility, the stop loss on a leveraged buy position may be traded at a lower price than the stop loss price. Whereas, the stop loss on a leveraged sell may trade at a higher price than the stop loss price.
Understanding contributed margin and potential risks in Leveraged Trading
Contributed margin is the amount of capital (fiat or crypto) that you contribute in order to open and maintain a leveraged position. The contributed margin is used to cover any potential losses that may occur as a result of your leverage position.
While the contributed margin is used to cover any potential losses, and your position is automatically liquidated when it falls below 10% margin, in instances of extreme market volatility, there is a possibility of losing not only the contributed margin but also incurring additional losses.
Key takeaway:
In extreme market conditions, you could lose all of your contributed margin, plus additional losses on your leveraged position.
What is a margin call?
A margin call is a request to deposit additional collateral (also known as margin) in order to maintain the required level of margin for an open position. This happens when the value of your position falls and the available collateral is insufficient to support the leveraged position.
If your position goes into a margin call, it means that your available margin has fallen below 15% level and your position is at high risk of mandatory liquidation.
In volatile market conditions, it’s important to carefully manage your position and maintain the required level of collateral to avoid the possibility of reaching mandatory liquidation. If you receive a margin call, it means that your position is at high risk of reaching mandatory liquidation, which occurs if your margin falls below 10%.
Key takeaway:
Your account will go into margin call if your margin falls below 15%. This is more likely to happen at higher leverage levels, such as 5x, compared to lower levels like 2x. Mandatory liquidation will occur if your margin percentage drops below 10%.
What should I do if I receive a margin call?
If the market moves against you and your available margin falls below 15%, you will receive a margin call notification. In this situation, you may take action to avoid mandatory liquidation by posting additional collateral or closing your position.
If you receive a margin call notification and you do not manage your position effectively, your position may reach mandatory liquidation before you can post additional collateral.
Key takeaway:
If you receive a margin call notification, your position may reach mandatory liquidation before you can post additional collateral.
What is mandatory liquidation?
If your position value decreases in value and your margin falls below 10%, Independent Reserve may be forced to close part or all of your position in order to reduce your risk of further losses. This process is known as mandatory liquidation. Independent Reserve can close your position without your permission to generate the funds needed to repay the loan on your position.
The mandatory liquidation is set at 10% margin, which means that if your position margin falls below 10% of your position value, your position will be automatically liquidated at the best price available in the current market conditions.
Key takeaway:
If your margin percentage falls below 10% your position will reach mandatory liquidation, and your position will be partially or fully liquidated at the best price available in current market conditions.
What does margin mean in leveraged trading?
Your margin percentage is calculated by dividing your collateral value by the total position value. The margin percentage impacts whether or not a position is subject to mandatory liquidation and is affected by price movements in the market. If the margin percentage is lower, the position is closer to being liquidated. If the margin percentage is higher, the position is further away from being liquidated.
This means that if the market moves against your position and your available margin falls, you are at greater risk of mandatory liquidation. To avoid this situation, it’s important to closely monitor your margin percentage and take action to post additional collateral or close your position if necessary.
What is a leveraged buy and a leveraged sell best described as?
A leveraged buy is a type of trade that will likely make a profit in a rising market and make a loss in a falling market.
Whereas, a leveraged sell is a type of a trade that will likely make a profit in a falling market and make a loss in a rising market.
Examples of a leveraged buy
Let’s look at eight examples of a Bitcoin leveraged buy position where the price of Bitcoin goes up or down by 10%.
If you open a new Bitcoin leveraged buy position at 2x leverage, and the price of Bitcoin goes up 10%, your margin percentage will be higher than 50%.
If you open a new Bitcoin leveraged buy position at 2x leverage, and the price of Bitcoin goes down 10%, your margin percentage will be lower than 50%.
If you open a new Bitcoin leveraged buy position at 5x leverage, and the price of Bitcoin goes down 10%, your margin percentage will be lower than 15%.
If you open a new Bitcoin leveraged buy position at 5x leverage, and the price of Bitcoin goes up 10%, your margin percentage will be higher than 25%.
Examples of a leveraged sell
The same principles apply to leveraged sell positions.
If you open a new Bitcoin leveraged sell position at 2x leverage, and the price of Bitcoin goes up 10%, your margin percentage will be lower than 50%.
If you open a new Bitcoin leveraged sell position at 2x leverage, and the price of Bitcoin goes down 10%, your margin percentage will be higher than 50%.
If you open a new Bitcoin leveraged sell position at 5x leverage, and the price of Bitcoin goes up 10%, your margin percentage will be lower than 15%.
If you open a new Bitcoin leveraged sell position at 5x leverage, and the price of Bitcoin goes down 10%, your margin percentage will be higher than 25%.
How do I contribute additional margin?
To contribute additional margin, you can assign specific fiat or cryptocurrency from your account against each open position individually.
You can only contribute fiat or cryptocurrency that matches the currency of the open position.
How is initial collateral contributed for new positions?
When you open a new leveraged position an initial collateral is reserved as margin for the position. Initial collateral is reserved and selected automatically and it can be cryptocurrency or fiat depending on the type of leveraged position.
For a leverage buy, fiat will be used as in initial collateral, and if you have insufficient fiat, a cryptocurrency that matches the cryptocurrency of the leveraged buy will be used.
For a leverage sell, cryptocurrency that matches the cryptocurrency of the leveraged sell will be used as initial collateral, and if you have insufficient crypto, fiat will be used.
How do I pay back the advanced funds for my position?
There are 2 options for paying back funds that have been advanced to you:
- Closing your position – In this instance the funds that were advanced to you are returned automatically when you close your leveraged position or if your position has been subject to mandatory liquidation.
- Returning your loan – If you have a sufficient balance in the currency in which the loan was taken out, you can elect to pay back the loan which will close your position.
What can be offered as collateral?
The collateral you provide towards your leveraged position can consist of either fiat or cryptocurrency.
It’s important to note that only the same type of cryptocurrency and fiat as the position itself can be used as collateral. For instance, if you have an AUD/BTC position, you cannot use USD or ETH as collateral.
The selection of initial collateral is determined by the type of leveraged position you are opening. In the case of a leveraged buy position, the system will automatically utilise fiat as the initial collateral. However, if there is insufficient fiat collateral, the system will then use cryptocurrency (specifically, the same type as your position).
For a leveraged sell position, the initial collateral will be the cryptocurrency associated with the position, followed by fiat if the cryptocurrency collateral is insufficient.
For a leveraged buy, fiat collateral (along with advanced fiat) is used to purchase cryptocurrency for the position, however cryptocurrency collateral for a leveraged buy is used as is towards your position margin.
For a leveraged sell, cryptocurrency collateral (along with advanced cryptocurrency) is sold for fiat, however fiat collateral for a leveraged sell is used as is towards your position margin.
What fees are charged for leveraged trading?
There are no position opening or closing fees when opening or closing a position. However if your position has been subject to mandatory liquidation, a 1% fee on the advanced portion of the funds is applied.
Standard brokerage fees are applicable to opening and closing a position as well as if your position has been subject to mandatory liquidation.
A daily interest of 0.1% is charged on outstanding advanced funds for a position
