How to Use Leverage in Binance
With Binance, there are plenty of trading possibilities. Margin trading, for example, allows users to trade cryptocurrencies with leverage, which can significantly impact their wins or losses. Since this is a sensitive tool that should be used with caution, it’s advisable to do your research before making your first investment.
Fortunately, this article offers all the necessary information you’ll need to know. Starting with the basics, it will explain what leverage is, when it’s used, and how to use it. The dangers of high leverage will also be discussed, along with what leveraged tokens are and more. Without further ado, let’s dive right in.
Introduction to Leverage
Leverage is a crucial tool in most traditional and crypto markets. It gives traders better capital efficiency, as they aren’t required to lock up their entire capital. With options and futures combined, leverage helps bring liquidity into the market.
So, how does leverage work?
This tool is a part of margin trading, a blend of spot and futures trading methods where investors trade cryptos with leverage. Much like spot trading, where you can buy or sell an asset directly, margin also involves an instantaneous crypto-asset exchange. The difference, however, is that you get to incorporate leverage into the trades and multiply its value from two up to 10x, as allowed by futures contracts.
To use the leveraged funds, you must invest collateral (margin) and pick your desired leverage.
It’s important to exercise leverage with caution, as this action can boost potential risks and returns. If you over-leverage or misuse the tool, you’re likely to fail as a trader. To avoid having your mistakes eliminate your capital, it’s best not to over-leverage. Cryptocurrencies can be volatile and unpredictable, and you can lower your chances of success on any type of trade, including Binance.
Here’s how to start Marginal Trading on Binance:
- Navigate to the Margin Account page on Binance and choose “Transfer” to transfer your assets.
- Hit “Borrow” on the Margin Account to start borrowing and confirm your asset.
- Go to “Margin Trading” to begin Margin trading.
- Hit “Repay” to repay your borrowings.
When Do You Use Leverage?
In margin trading, leverage can be used in many cases. The most popular use is for hedging against an asset or portfolio. This action involves creating new positions that have a negative correlation with your existing positions. This form ensures mitigation of potential losses.
How Does High Leverage Impact Trades?
Leverage amplifies losses and transaction costs. If you deposit 500 USDT in your futures wallet and open a 100x leverage with that deposit, you’ll get a total exposure of 50,000 USDT (500×100). Once you consider the 0.04% taker fee, it will cost you 20 USDT to open this position. This translates to 4% of the account.
If your position goes wrong, you’ll lose 4% of your account capital. This, in turn, increases your effective leverage. When you trade perpetual contracts, you’ll incur fees that get charged every eight hours, costing you an extra 20 USDT each day.
It’s crucial to consider this associated cost of using high leverage.
Using the Responsible Trading Program
Binance has a unique Responsible Trading program that educates traders on the potential dangers of trading. If you’re new to leveraging, quizzes and training videos are available after signing up to learn more about these dangers.
The platform has also limited the maximum leverage for new traders (20x) for accounts that are less than 60 days old.
Using Leveraged Tokens
Binance introduced Leveraged Tokens to give assets leveraged exposure. These tokens can be traded on the spot market much like other tokens, where each product refers to a basket of perpetual contract positions. The leveraged token price depends on the price change in the perpetual contract market, moving the leverage levels up and down.
In contrast to marginal trading, you can gain exposure to leveraged positions without putting up collaterals. This allows you to maintain a good margin level without worrying about liquidation risk. However, certain risks still exist, including price movement effects on the perpetual contracts market, funding rates, and premiums.
Keep in mind that you can’t withdraw the Binance Leveraged Tokens. Instead, you can store them in your Binance account.
How to Use Leverage Right
The most important advice when using leverage on Binance is not to use the maximum available leverage out of habit. Use it when you need extra flexibility, but try to go for lower amounts in your day-to-day trading experience.
The following are some generally recognized guidelines before choosing a leverage degree:
- Keep low leverage levels.
- Protect your capital and reduce the downside by using stop-orders. These are orders that work by determining a specific sum above which you can or can’t buy or sell anymore.
- For each position taken, limit your capital to 1-2% of your total trading capital.
Ideally, you want to use an amount that suits you best. If you’re just starting out, it’s best to use a 2x or 5x leverage.
Generally, the suitable amount can be determined by your experience, comfort levels, and risk tolerance in the crypto market trading. As a beginner, it’s only logical that you’ll use caution as you’re just beginning to learn how to trade.
Important Note: This post is only intended for reference purposes. No such information represents advice or recommendations that any strategy is suitable for any specific user. If you’re still uncertain about leveraging in marginal trading, please seek professional advice.
Using Leverage on Binance – Key Takeaway
Whether you’re a beginner or an experienced trader, it’s important to perform leverage with caution. The higher the leverage, the higher the potential dangers. Plus, the taker fee and other expenses make over-leveraging too risky. Responsible trading is key to successful trading.
Fortunately, Binance has a dedicated program for teaching new traders how to use marginal trading and has imposed limits on how much leverage you can use if you have a new account. You can also use the leveraged tokens to minimize liquidation risks.
How much leverage do you think is suitable for you? What could happen if you went over that limit? Share your thoughts in the comments section below.
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