Instead of directly telling about leverage trading lets clear some basic concepts
What is Leverage?
Leverage is a financial term usually used when you are buying any assets using borrowed money it can either from a bank, broker, or a known person. For example, you found a crazy real estate deal nearby your locality but you don’t have enough money to close that deal then you can borrow money directly from the bank considering your credit score is good enough and the bank lends you money and you closes that deal, you keep paying monthly installments on time. After a few months, things went as expected and you get your desired profit and return the bank’s money. In this scenario, things went as expected but if the price falls and somehow you are unable to pay monthly installments on time then most probably you have to sell that how at a cheaper price you had bought and you may lose your own collateral to return bank’s money.
I hope you got to know what leverage is from the above definition and example.
What is Leverage Trading?
In leverage trading, traders can borrow multiples of his collateral from a broker for a certain period of time. If his trade goes well, he can close his position in profit and return the broker’s money with some fees. But if the situation goes worse and the trader is unable to return the broker’s money then the broker will liquidate the trader’s assets or contract to claim his money and the trader may lose his collateral.
Leverage Trading is applicable in both cryptocurrency and stock market. Trader can opt for Cross Margin Mode and Isolated Margin Mode.
Cross Margin Mode: Share your margin balance across all open positions to avoid liquidation. In the event of liquidation you risk losing your full margin balance along with any remaining open positions.
Isolated Margin Mode: Manage your risk on individual positions by restricting the amount of margin allocated to each. If the margin ratio of a position reached 100%, the position will be liquidated. Margin can be added or removed to positions using this mode.
Usually, a trader should not go above 10x leverage, he may lose his whole collateral, and leverage trading is not recommended in a volatile market.