Binance trends as the largest crypto trading platform in terms of volume. Margin trading allows you to trade assets on borrowed funds in the crypto market. You can open a position with a minimum margin limit and applicable leverage. Compared to regular trading accounts, margin trading accounts allow traders to obtain more funds and support them in using positions.
Binance Margin Trading
Binance allows you to do margin as well as leverage trading. The exchange allows you to trade 3x Cross Margin and 5x isolated Margin. If you are interested in learning how to trade margin on Binance, you can follow the below mentioned steps.
1. Open a Margin Trading Account on Binance
In order to start trading on Binance you will need to set up an account first. Follow this link to set it up here to receive 20% discount on your trades.
After logging into your Binance, on the account’s dashboard, you will be able to see your account balances. Below “balance details,” click on the option “Margin” to start opening a margin trading account on Binance.
You will be able to verify your identity (KYC) and ensure that your country is not blacklisted. It is also a must that you enable two-factor verification (2FA).
After the verification process, you can see a pop-up window on the margin trading questions. You’ll have to complete it by prompting “start the quiz.”
2. Transfer Your Funds
After activating the margin account in your Binance, you can now transfer funds from the Binance wallet to the margin trading wallet. After clicking “margin,” you will be able to see a “transfer” tab on the right side of the page and click. You will be able to see which coin to transfer.
We will go on to use BNB as the case study.
Input the amount you wish to transfer from the Binance wallet to the margin wallet, and then click “confirm the transfer.”
Margin Trading at a Glance
After transferring the coins to the margin wallet, you can now use those coins as collateral to borrow funds. The margin wallet balance is the determinant of the rate you can borrow, having a fixed rate of 5:1. Now, if you have 1 BTC, you will be able to borrow 4 more.
When you select the coin, you wish to borrow and the amount, click on “confirm borrow.”
After your margin account is credited with the borrowed coins, you can now trade the borrowed funds while having a debt of the coins plus the interest rate. The interest rate is updated every 1 hour.
On the right side of the screen, you can see the margin level of your account. The margin level gives a trader the risk level according to the borrowed funds (total debt) and the funds you hold as collateral on the margin account (account equity).
The margin level is determined by the market movements, which means that if the prices move against your prediction, your assets can be liquidated. In case there is liquidation in your account, there is a high possibility you will be charged extra fees.
To evade such traps for liquidation, you can be able to calculate your margin level using the formula:
Margin Level= Total Asset Value/ (Total Borrowed+ Total Accrued Interest)
If the margin level drops below or to 1:3, a call will be identified as the Margin Call. The call serves as a reminder that you should either increase your collateral (by depositing more funds) or reduce your loan (by repaying what you have borrowed).
If you do not align with the call and the margin level drops to 1:1, your assets get automatically liquidated, which means that Binance will sell your funds at market price to repay the loan.
Trading on Margin
If you want to use your borrowed funds to trade, go to the margin page and trade normally using stop-limit and OCO orders.
The limit allows you to place orders at a price of your choice. Limit orders will execute when the market meets your order requirements. You can even alter or cancel the order to find a better price before executing it.
On the stop-limit order, the asset’s value reaches the top price. Thus the order to buy/sell the asset at the given limit price is executed.
The One-Cancel-the-Other (OCO) order is a combination of a limit maker order and a stop-limit order with the same quantity on the same side. If either of the orders executes, the stop-price triggers and the other cancels automatically. If you cancel one of the trading pairs, the entire pair will cancel.
To repay your debt, click on the “Borrow/Repay” button and select the “Repay” tab.
The amount to be paid back constitutes the amount borrowed plus the interest rates. You will have to make sure you have the requisite balance before proceeding.
Select the coin you wish to repay and click “confirm repayment.” You can only use the same cryptocurrency to make the repayment.
When you wish to transfer back to your regular Binance wallet from the margin wallet, click on “transfer” and use the button between the two wallets to change the direction of the transfer. Select the coin and the amount and click on “confirm.”
The Upsides and the Downsides of Margin Trading on Binance
Remember that margin trading has its benefits and also its downsides. As a benefit, margin trading is an insurance fund that protects your account when your equity is lower than 0. Margin trading has a cooling-off period, an option introduced to avoid excessive trading on Binance. The risk funds protect your digital assets from all risks.
However, for all its upsides, margin trading does have the obvious disadvantages of increasing losses in the same way it increases gains. Additionally, unlike regular spot trading, margin trading has the possibility of losses that exceed a trader’s initial investment. Consequently, it is a high-risk trading method. Thus, the higher the volatility and the more leverage used, the greater the risk.
Professional traders often use margin trading. The leverage involved can lead to exaggerated market moves as “long squeezes or short squeezes, where a sudden price movement can trigger liquidations and result in greater volatility. This is a characteristic of the crypto markets, which trade very thinly compared to most traditional markets.
Before engaging in margin trading on Binance, ensure you identify with all the risks since the crypto markets are volatile.
Vincent Munene is a freelance writer and a great blockchain enthusiast. Blockchain has changed his life in terms of financial freedom and in return, he likes to educate people and keep them up to date on everything blockchain. He is a Biochemist by profession and also loves to play the piano.