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Starting small and compounding when margin trading
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If you’re just starting out with margin trading, it’s best to start small. If you’re someone who pays attention to Crypto Twitter and Crypto Telegram, you’ve probably heard many stories about unsuspecting traders losing their entire net worth in a single trade. Yes, this does happen and it is scary, but it doesn’t have to happen to you.
The concept of consistency is something that unsuccessful traders rarely consider. Instead, their thought process when creating a margin account might go like this.
- Okay, I have USD15,000 in savings and I’ll use USD10,000 to trade.
- If I open a 25x position, I can trade with USD250,000.
- Crypto is volatile and I can easily make 20%.
- That’s a USD50,000 profit, which means I won’t have to work for a whole year!
- Hm, let me start researching where to go for vacation.
In general, a trader who thinks like this will most likely get REKT. Why?
- Trading with a large chunk of your life savings is not a good idea. Unless you’re a seasoned professional, it’s best to trade with money that would otherwise go in the “disposable income” category.
- Liquid offers 25x leverage. Going “all in” with 100% of your available margin will result in a very tight spread between entry price and liquidation price. This is NOT good for volatile assets like crypto.
- Dreaming up an alternate reality before having the financial means to make that reality happen will likely influence your trading decisions.
So, if you’re new to margin trading - start small and aim for consistent profits. Think “I’m going to attempt to make 2.5% per week over the next five years” instead of “I’ll make 20% by next week”. This is where compounding comes in. With a starting account size of USD500, 10% profit per month, and an 100% reinvestment rate, you’d have over USD150,000 after five years. That’s the power of compounding profits.