Margin trading and leverage are important concepts to understand when it comes to trading. This article will explain the difference between short and long margin trading with leverage, and provide examples to help you better understand these concepts.

What is margin trading?

Margin trading is a way to trade assets using borrowed funds from a broker. When you open a margin trade, you're essentially borrowing money to invest in an asset. The amount of money you can borrow is called the "margin", and it's usually expressed as a percentage of the total value of the asset you're trading.

For example, if you want to trade €100 worth of an asset and the margin requirement is 10%, you would need to put up €10 of your own money and borrow €90 from the broker.

What is leverage?

Leverage is a way to amplify the gains and losses of a trade by using borrowed funds. Leverage is expressed as a ratio, such as 5:1 or 10:1. For example, if you use 10:1 leverage on a €100 trade, you would be able to control €1,000 worth of the asset (i.e. 10 times your original investment). This means that if the asset price goes up by 1%, your profit would be 10% (minus any fees or interest charges).

Short vs long margin trading with leverage

Short-selling is a practice which enables traders to open a position that will increase in value if a instrument’s price goes down. This is used either when markets are falling, or as a hedging tool.

Long margin trading is when you predict that the price of an asset will go up. This means you buy the asset first (borrowing money from the broker) and then sell it later at a higher price to make a profit.

How to go short?

Let's say you believe that the price of Bitcoin is going to fall in the near future and you want to open a short margin trade on Bitcoin with a 2x leverage.

If you have €100 and you want to try margin trading and short Bitcoin with 2x leverage, you can control €200 worth of Bitcoin. Here's how the trade might work:

1. You invest €100 of your own money.
2. Change lends you an additional €100 to complete the trade.
3. You now have €200 to invest in the trade.
4. If the price of Bitcoin goes down 10%, you would make a profit of €20.

Here's how the calculation works:

• You short €200 worth of Bitcoin when the price is €30,000 (i.e., you sell 0.0066667 BTC).
• The price of Bitcoin drops 10% to €27,000.
• You buy back 0.0066667 BTC for €180, which gives you a profit of €20 (i.e., €200 - €180).

However, if the price of Bitcoin goes up instead of down, then you'll need to buy back the Bitcoin at a higher price than you sold it for to close your position. This means that you'll incur a loss, which will be magnified by the amount of leverage you used.

In case of a short position on Bitcoin with 2x leverage, if the price of Bitcoin went up 10%, you would lose 20% of your initial investment. If you had invested €100, you would lose €20, leaving you with €80.

How to go long?

If you have €100 and you want to open a long position on Gold with 20x leverage, you can control €2,000 worth of Gold. Here's how the trade might work:

1. You invest €100 of your own money.
2. Change lends you an additional €1,900 to complete the trade.
3. You now have €2,000 to invest in the trade.
4. If the price of Gold goes up 2%, you would make a profit of €40.

Here's how the calculation works:

• You open a long position with €2,000 when the price of Gold is €1,000 per ounce (i.e., you buy 2 ounces of Gold).
• The price of Gold increases by 2% to €1,020 per ounce.
• You sell your 2 ounces of Gold for €2,040, which gives you a profit of €40 (i.e., €2,040 - €2,000).

Similarly, if the price of Gold goes down, you'll need to sell your Gold for less than you bought it for, which will result in a loss. As with short margin trading, the amount of leverage you use will amplify your gains and losses.

Conclusion

Margin trading with leverage can be a powerful tool for increasing your trading profits, but it also comes with higher risks. It's important to understand the concepts of margin, leverage, and the differences between short and long margin trading before you start trading with real money. Be sure to do your own research, set stop-loss orders to limit your losses, and never invest more than you can afford to lose.