How to Calculate Proper Leverage and Margin Call Price on the PrimeXBT Platform?
Whether trading digital currency, you can increase your potential profit by skillfully using leverage trading. Prime XBT trading platform offers up to 100x leverage while taking both long and short positions.
What is leverage?
Leverage is money borrowed from the trading platform (in case of Prime XBT, up to 100 times the traders account size) which can be used to further solidify the trading position. Whether going long or short, a trader can utilize the power of leverage to increase their profit by up to 100 times. This would mean that a 1% gain leveraged 100 times can turn into a 100% gain! The possibilities are endless.
However, we cannot talk about the positive side of leverage without mentioning the negative side. If a position is leveraged 100 times, a 1% move in the right direction would result in a 100% gain, but a 1% move in the wrong direction could result in a 100% loss. However, the trader cannot have “debt” towards the trading platform, as any leveraged negative move which equals to the base non-leveraged amount of funds will get a margin call. A margin call is a last-resort move of closing of a position a trader is in so any further losses can be prevented.
No one likes seeing their position being shut down, nor losing their capital. This is why the right calculations need to be done in order to establish how much leverage to use.
How to calculate Margin call price and Leverage
Calculating a proper leverage is a necessary knowledge before entering any leveraged trade. The reasoning is simple: traders need to use leverage to their advantage on the upside, but it should not affect their downside. So how can we do this?
Using leverage is not as tricky as it sounds. Determining the amount of leverage depends on two things:
1. The support area that a trader has determined prior to entering a trade;
2. The certainty of trade going the right way.
Every trader, before entering a position, does the analysis. One of the most used analysis methods is determining support and resistance areas. Leverage should be used, so the margin call should be below the support line which will most likely hold in case of an unexpected small move against the direction of the trade. This brings an additional layer of safety even while a position is leveraged. This way, the downside is not affected while the upside is leveraged.
As for the certainty of trade going in the right direction, things are a lot more subjective. The bottom line is: the more certain a trader is in the trade, the higher leverage will be used.
Utilizing leverage is always beneficial, and that is why all of the institutions as well as most of the traders use it. However, one should act with caution, and use it in a calculated manner, to prevent losses. Check out Prime XBT, a trading platform which allows for leverage of up to 100x, and many more features!