Everyone knows that the best and proven way to invest is to buy low and sell high. By the way, this method is often even more profitable than trading. For example, some of our top traders recently shared statistics: if they bought bitcoin in 2016 (the year they started trading on EXMO) and kept it until 2021, selling at 60k, they would get 2.5 times more net profit than today. Of course, we consider this example under ideal conditions: we already know that bitcoin will grow. But what if you, succumbing to persuasion and FOMO, bought bitcoin last week at 60,000 USD, and the trend reversed, and now you are sadly watching the downward movement? It's effortless: the best way not to lose but also to make money in a falling market is to hedge your purchases with short positions on a margin platform.
What is margin trading? You are borrowing money from the exchange to make a deal. The amount of borrowing is called leverage. If it says that the leverage on the exchange is x10, then this means that for every dollar in the account, you can get 10 dollars. The essential advantage of this type of trading is the ability to open short positions, or as they are also called "shorts". A short position is an opportunity to sell a coin without directly owning it and thereby capitalize on a price drop while everyone is looking at their negative PNL. You borrow 1 BTC from the exchange for 60,000 USD, sell it, the price goes down, you buy bitcoin at 57,000 USD, give 1 BTC to the exchange and take 3,000 USD of profit.
Now let's go back to today's market and our example.
You bought one bitcoin on the spot market for 60,000 USD in anticipation of the growth of the asset. But the market often has unforeseen corrections caused by negative information background. To hedge your spot purchase, you go to the margin platform and open a short position of 58,500 (support level) for 1 BTC, with a deposit of 3,000 USD and x20 leverage. Thus, we compensate for the possible loss on the spot with our profit on the short position. You don't need to monitor the market every second in anticipation of a reversal. All you need is just to place a trailing stop order (a tool that allows you to automatically set a stop loss at the required distance from the market price), which will enable us to exit with a profit if the market reverses. Profit!
As you can see, such a scheme is ideal for hedging spot purchases in case of a possible market reversal.
Of course, such a scheme also has risks.
- If you do not place a trailing stop, there is a high probability that the market will reverse, the price will go up, and you will continue to remain in the hedging position with a zero result.
- Be sure to remember that on a margin platform, borrowed funds do not come for free. The trader must pay interest to the exchange for the use of these funds, which may be in the form of opening fees, renewal fees, and closing fees.
- It would help to keep a close eye on the liquidation price for a short position.
- When the liquidation price is reached, your position will be forcibly closed.
This content is being provided to you for informational purposes only, does not constitute an offer, or solicitation of an offer nor a recommendation by me to buy, sell, or hold any security, financial product, or instrument referenced in the content, and does not constitute investment advice, financial advice, trading advice, or any other sort of advice.