Trade Bitcoin Trading

Bitcoin Leverage and Margin Explanation & Example

Definition of Trading Terms:

Margin required: This is the total funds your online broker needs from you so you can start a trading deal. It is shown as a percentage.

Equity: This figure represents the total capital available in your BTC USD Cryptocurrency account balance.

Used margin: The amount of money on your account that has already been used up when buying a Bitcoin contract, this Bitcoin contract is the trade position that is displayed in open trades. As a trader you can't use this amount of money after entering a trade with it because you've already used it and it's not available to you - until after when you close your open position.

Put simply, you must maintain this used margin for trading as a security in order for you to continue holding the open position that you have opened using this leverage that the broker has given you, since your broker has initiated a trade transaction for you using the capital that you have borrowed.

Free margin: The amount of money on your account which you can use to execute new trades. This is the sum of money on your account which has't yet been leveraged because you haven't yet opened a transaction with this money - this margin is also very important for you as a trader or investor because it enables you as a trader to continue holding your open positions as will be illustrated below.

However, if you over use leverage, then free margin will drop down below a certain percent at which your broker will be forced to close all of your trade positions automatically, leaving you with a big loss. The broker at this point closes all your open positions because if your trades are left open the broker would lose the money you have borrowed from them.

Always keep plenty of free margin. Use no more than 5:1 borrowing. Better yet, stick to 2:1 for BTCUSD trades.

Leverage Set by Brokers vs. The Leverage You Actually Use

If the set leverage is 5:1, it means you can borrow up to 5 dollars for every dollar you have, but you don't have to borrow all 5 dollars: you can borrow 4:1 or 2:1. So, even if the leverage is 15:1, your actual leverage will be the 4:1 or 2:1 you borrowed to trade.

Example:

You have $10,000 (Equity)

Leverage set 5:1

Leverage Used = Amount used /Equity

1 Contract - $5,000

If you buy 10 standard lots which is equivalent to 50,000 dollars you will have used

= 50,000/10,000

= 5:1

5 Contracts

If you buy 5 lots which is equal to 25,000 dollars you'll have used

= 25,000/10,000

= 2.5:1

2 Contracts

If you buy 2 lots which is equivalent to 10,000 dollars you will have used

= 10,000/10,000

= 1:1

This effectively means you will not utilize any borrowed capital (leverage), and your trading will only use your deposited funds.

In these 3 situations, you can see that even though the leverage is set at 5:1, the leverage used changes based on how much is being traded.

Why not choose 5:1 as the maximum leverage? It's recommended to use even lower leverage options to adhere to appropriate risk management rules and minimize potential losses.

While this query seems simple, it involves complexity due to the use of borrowed funds, commonly known as Trade Leverage, when opening positions. When securing capital from any lending source, including a bank, collateral or security is mandatory to obtain the loan, even if that collateral is secured through monthly salary deductions. The same principle applies to Bitcoin Trading and Online Trade in general.

In online trading contexts, the security deposit required is termed margin: this is capital you commit to your broker.

This margin requirement is assessed in real-time as trading occurs. To retain the full amount of borrowed leverage, one must sustain what is termed the required capital (your initial deposit). This applies when your Leverage ratio is 5:1.

When trading - if you have $10,000 & use leverage ratio 5:1 and buy 10 standard lots for $50,000 your margin on this trade is the $10,000 in your account, this is the money that you'll lose out if your open position position goes against you - the other $40,000 which is borrowed from your broker, they will close the open positions transactions automatically once your $10,000 has been taken by the market.

This situation only applies if your broker sets the Margin Call Requirement at 0% before automatically closing your positions.

In sideway markets, MA gets false signals from price swings. The line moves with ups and downs. It flips buy to sell fast.

Most brokers set their margin call level at 20 percent are the best ones because the likely-hood them closing your position is reduced as displayed in illustrations put on display above.

Check margin level in MetaTrader 5 during trades. The platform shows it as a percentage. A high number means less chance of trades closing due to low funds.

If Bitcoin price is $5,000

Example of Margin level calculation

10 btcusd Lots

Using leverage 5:1

If leverage is 5:1 and you transact 10 Bitcoin Lots equal to $50,000

$50,000 dollars (10 lots) divided by 5:1 - your used capital is $10,000

Calculation:

= Capital Used * Percentage (100)

= $50,000/$10,000 * Percentage (100)

Margin Level = 500 %

Investor has 480% margin level above the required amount (because margin call level is 20%)

Trading 4 Bitcoin Lots

If leverage is 2:1 and you transact 4 Bitcoin contracts, equal to $20,000

$20,000 dollars (4 lots) divided by 2:1 - your used capital is $10,000

Calculation:

= Capital Used * % (100)

= $20,000/$10,000 * Percentage (100)

Margin Level = 200 %

The investor maintains an 180% margin level above the mandatory threshold (given the margin call point is 20%).

When an individual possesses higher leverage, it indicates that they have a greater margin level percentage exceeding the required amount (also known as more 'Free Margin'). Consequently, their open Bitcoin trade positions are less susceptible to closure due to a margin call, as previously explained. This elucidates why investors often select a leverage option of 5:1 for their Bitcoin accounts, adhering to their risk management guidelines, and refrain from trading above a 5:1 leverage ratio.

The margin levels described earlier show up on the MT5 platform. Traders can view them below the bitcoin charts in the trades window on MetaTrader 5 for BTCUSD.

Learn More Lessons:

Bitcoin Broker