How to choose currency pair if you start exercising margin trading?
A reasonable trader, who is going to exercise margin trading would definitely want to provide himself/herself with some basic knowledge
From the very beginning, if you do not want to lose your money when doing margin trading, you should better choose appropriate currency pairs to test margin trading (MT) effectively. Additionally, it is strongly recommended that you do not deposit a sustainable sum of money while you are still not good with the basic principles of MT. You should also avoid using high leverage to decrease the possible risks until you are ready to cope with them.
So, what cryptos are to be chosen by the inexperienced users to start exercising margin trading? First of all, you may choose cryptos with low volatility (price variability). Volatility should not be non-existent (which is typical of some cryptos). Otherwise you can wait for price movement for weeks and even months.
Depending on market condition, typical volatility of one or another trading pair can differ from time to time. However, it is still possible to determine cryptos for which moderate volatility is more typical, and extreme price movements is less typical than for the other cryptos. Initially, it is the case of the most capitalized cryptos
Interesting, but it is not only capitalization that affects volatility shifts. Volatility is affected by many factors including market activity, particular platform features (major traders’ activity), and BTC price rate comparison to other cryptos. Let’s have a closer look at the issue.
Supposing a regular Bitcoin pump has occurred during Litecoin rate active market movement. Bitcoin price is increasing in USD including its rate comparing to the other cryptos (which do not increase at the moment to USD). In this case, Litecoin rate in LTC/BTC pair will be weakened. Moreover, those traders who would like to profit from Bitcoin-pump will transfer their funds from Litecoin to ever-increasing Bitcoin, which will decrease Litecoin rate, both in LTC/BTC and LTC/USD currency pairs (as you may see, there is still a connection between money transfer and altcoins capitalization). As a result, if Litecoin rate was increasing, then this trend would most evidently be over. However, if it was decreasing, a decline would be slightly enhanced due to both internal and external factors. That is how altcoins volatility in LTC/BTC pair is higher than in altcoins/fiat pairs (for instance, LTC/USD or LTC/EUR).
What crypto-pairs are better to choose when you start testing MT?
Let’s have a look at the most appropriate crypto-pairs for margin trading. Reflecting on the above, the most appropriate cryptos should not experience high volatility rates.
1. Bitcoin should be mentioned first as one of the most suitable cryptos for MT.
On the one hand, in the context of a general Bitcoin price monthly growth, BTC/USD
rate may vary (rate is rising by a principle ‘two steps up, one step down’). On the other, if we start comparing BTC/USD rate charts to the ones of less capitalized cryptos, we will see that price decline by 30-50% during relatively short terms (a day or a couple) happens to Bitcoin more seldom (once/twice a year) and is pretty determined by unpleasant news, which are difficult not to notice when you track them continually.
Additionally, Bitcoin is experiencing a stable positive trend during months and even years. A lot of analysts confirm that such growth trends will be kept in the future.
Reflecting on the above, bitcoin/fiat currency pairs (like BTC/USD or BTC/RUB) are good for MT with “long” position and moderate leverage, a trade, which is designed for ‘good’ price expectation, both time-limited and time-extended. In the last case, margin credit fees, which usually make 0.08% per day are recommended to be mentioned in your trading plans.
2. Nowadays, Ethereum (ETH) rate does exercise both stability and growth. However, the future of Ethereum cannot be determined for sure due to the continual modifications
on it. In the nearest months to come, ETH rate shifts can be expected. In terms of Ethereum general trend, if the support team manages ETH network overload issues effectively, it can become genuinely positive and vice versa (if it does happen, ETH growth rate will surpass Bitcoin one). ETH/USD is the most perspective among those linked to ETH. However, ETH/BTC pair should also be regarded.
What are the risks of exercising margin trading on cryptos with high volatility?
Let’s review why volatility is not good when testing margin trading, especially by an inexperienced user.
Some volatility boosts trading: after you have bought asset for borrowed funds, the price for this asset will be equal to the one which you planned to sell it for due to average asset rate markers “shakedown”. If you have put a limit sell order in advance, asset will be sold automatically. Otherwise, you will be able to sell it at the market price; credit will be closed and money will be at your disposal.
Though high volatility increases trading volume, it can also lead to “margin call”. The risks of margin call are also enhanced by sudden rate rises and falls, when price momentary changes for a few tens of percent or many times more. The mentioned price shifts are more common for poorly capitalized pairs that are also experiencing significant volatility (yearly rate chart can determine its possible rate variability). Certainly, “break” can be positive to you. In this case, your limit order (if you have created one) will be activated a bit earlier than it usually happens; in this case, the same profit is expected.
Let’s take a look at a particular example of how an unexpected price move (either due to “break” or general price uncertainty) can affect your trading in case when you bought asset for borrowed funds.
Supposing you have bought 3 units of a cryptocurrency at a price of $30 for each. You have paid for these units with your own money, but you have also get $60 due to margin lending (1:3 leverage). You have specified your profit fixation price of $36 and created a limit buy order of 3 crypto-units at a stated price. However, before the price reached that mark in the context of its natural growth, the price rapid “shift” in 1.5 times from its level of $30 occurred (let’s assume that it happened when credit fees made a sum of 0.3 USD). The rest depends on a price bounce.
If the price goes up, your limit order will be bought at 36 USD (regardless of the fact that “break” peak was 45 USD), and you will earn:
(3*36)-30-60-0.3 = 17.7 USD
If the price goes down to 20 USD momentary or not, this will be enough for margin call to be activated on your borrowing, and asset could be immediately sold at a price which is slightly higher than 20 USD (due to the price of debt including fees makes 60+0.3 USD).
This sum will be enough to repay margin credit. However, you will be left neither your bargained 30 USD nor purchased cryptos. Additionally, all of a user’s assets are used as a way of charge. Thus, if a borrowing was issued in USD (asset was bought for this borrowing), and charged with some cryptos, then its rapid price decline will decrease the amount of maintenance, and increase the risks of “margin call”, especially in the context of unfavorable asset rate.
You can still avoid currency pairs with frequent serious “breaks” risks, but it would be better to secure one’s trading with stop-loss technology. Stop-loss – is a limit order (in our example – sell limit order), which you can create and put in exchange glass with a fixed selling price that would be smaller than the current one but still, distant from the one, after reaching which, “margin call” is activated. Now, if the price starts changing unfavorably, asset will be sold at a mentioned price and you will be able to avoid “margin call”. That is how due to the mentioned limit order activation prior to price collapse (or “margin call”), the unexpected price shifts losses can be minimized.
Additional materials that may help you:
How to protect account and personal data on EXMO?
How does cryptocurrency exchange trading work?
Monero and Zcash - new level of the anonymity
Cryptocurrency margin trading: how it works
What are the pros and cons of investing into cryptocurrency
Why do miners choose exchanges to exchange cryptocurrency for fiat funds
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Your respectfully, EXMO team
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