Leveraged trading allows you to amplify potential returns with a relatively small amount of capital. However, it also comes with significant risks. This article explains the concept of leveraged trading, the meaning of leverage multiples, and analyzes its differences from contract trading, along with its advantages, disadvantages, and risks. We'll also provide a step-by-step guide on how to use Binance leveraged trading and discuss applicable fees.
Understanding Leveraged Trading
Leveraged trading, in a broad sense, refers to any transaction that exceeds the capital currently available. More specifically, it involves borrowing funds to invest, thereby magnifying potential gains.
A common example is buying a house with a mortgage. You might only put down a 20% down payment and borrow the remaining amount from the bank. If the property value doubles, your profit relative to your initial investment would be significantly amplified.
What Does Leverage Multiple Mean?
The leverage multiple indicates the ratio of the total investment value to your actual capital. For instance, if you invest $1,000 to control a $10,000 position, your leverage multiple is 10x.
Different investment products allow varying maximum leverage multiples. Mortgages typically offer up to 5x leverage (e.g., an 80% loan-to-value ratio), while Binance leveraged trading can go up to 10x. Contract trading, on the other hand, may offer leverage as high as 125x.
Pros and Cons of Leveraged Trading
Advantages of Leveraged Trading:
- Amplified gains and losses: The same amount of capital can yield multiplied profits or losses.
- Higher capital efficiency: Every unit of capital is utilized more effectively.
- Profit from declining prices: You can borrow an asset, sell it immediately, and repurchase it later at a lower price to repay the loan, pocketing the difference.
- Actual ownership of acquired assets: As long as you can repay the loan, you retain full control over the assets purchased.
Disadvantages of Leveraged Trading:
- Borrowing costs: Interest accrues over time until the loan is repaid.
- Skill requirement: It requires a solid understanding of risks and strategies to use effectively.
- Risk of forced liquidation: We'll explore this in the risks section below.
Risks of Leveraged Trading
Beyond the fact that losses are also multiplied by the leverage factor (e.g., a 10% loss becomes a 30% loss with 3x leverage), the biggest risk is forced liquidation. This occurs when the value of the borrowed assets falls below the loan amount, triggering an automatic sale to cover the debt.
In investment markets, this often happens when losses reach a specific threshold, commonly referred to as "forced liquidation" or "getting liquidated."
For example, if you use 10x leverage on Binance to buy $1,000 worth of a cryptocurrency with $100 of your own capital, a price drop of just 5.5% could trigger liquidation. After liquidation, you might receive $945, repay the $900 loan, and be left with only $45 from your original $100 investment.
Liquidation rules vary by platform. For Binance's specific policies, refer to their official documentation.
Leveraged Trading vs. Contract Trading
While contract trading is a form of leverage in a broad sense, in the cryptocurrency world, they are generally considered distinct methods:
| Aspect | Leveraged Trading | Contract Trading |
|---|---|---|
| Description | Borrowing to invest | Trading price differences |
| Actual asset ownership | Yes | No |
| Interest fees | Yes | No |
| Funding rate (cost or income) | No | Yes |
| Transaction cost | Higher | Lower |
| Max leverage | 10x | 125x |
| Ideal for | Arbitrage seekers | Experienced traders |
Unless your goal is to actually hold the acquired coins (e.g., for participating in events) or you prefer not to sell existing holdings, contract trading often offers greater flexibility and lower costs for those purely seeking profit from price movements.
Platforms Offering Leveraged Trading
Leveraged trading is available in various markets like stocks, forex, and cryptocurrencies. Major crypto platforms offering leveraged trading include Binance, OKX, Bybit, Bitget, and Gate.io. It's a common feature among exchanges.
The following guide uses Binance, the world's largest exchange, as an example.
Step-by-Step Guide to Binance Leveraged Trading
Step 1: Open an Account and Transfer Funds
First, open an account and complete identity verification. Then, deposit funds (e.g., buy USDT) and transfer them to your leveraged account.
Step 2: Execute a Leveraged Trade
On the Binance leveraged trading interface, key elements include:
- Trading pair: The asset you want to trade against USDT (e.g., BTC/USDT for Bitcoin).
- Cross/Isolated margin: Choose whether to share margin across positions or isolate them.
- Leverage multiple: Start with a low multiple; 1x means no leverage.
- Max order value: This equals your account balance multiplied by the leverage multiple.
- Auto-borrow/repay: Enabling these simplifies the process.
- Buy/Sell: You can buy or sell an asset, even by borrowing it first.
- Current price: The latest market price for reference.
- Order price: Your desired entry/exit price.
- Order amount: The total value you wish to trade.
After confirming, place your order. If you choose isolated margin, ensure you transfer funds from your main leveraged account to the isolated account first.
Once the order is placed, borrowing begins immediately, regardless of whether it's filled.
Step 3: Manage Your Position
After your order is filled, check your open positions to see borrowed amount, interest accrued, and liquidation price. If the market price approaches the liquidation price, consider adding funds to avoid automatic closure.
If you cancel an unfilled order, the borrowed funds remain; remember to repay them manually.
Step 4: Repay and Review P&L
Repayment can be done in four ways:
- Market sell repayment: In the "Positions" section, click "Repay" to sell assets at market price to cover the loan.
- Limit order repayment: Enable "Auto-Repay" and set a sell price. Be cautious not to exceed the borrowed amount to avoid over-selling.
- Manual repayment: Transfer additional funds to the margin account and use the "Borrow/Repay" feature to reduce the loan.
- Full repayment: Under "Funds" > "Margin," check "Total Debt" and repay until it shows zero.
Always verify that all loans are repaid and review your profit/loss statement.
Cross Margin vs. Isolated Margin
Binance offers two margin modes:
| Aspect | Cross Margin | Isolated Margin |
|---|---|---|
| Description | All positions share margin | Each position is isolated |
| Max leverage | 10x | 5x |
| Pros | Losses in one position can be offset by gains in another | Simple management; positions don't affect each other |
| Cons | Entire account can be liquidated | Lower capital efficiency |
| Ideal for | Experienced traders | Beginners |
For beginners, start with a single position. In this case, cross margin behaves similarly to isolated margin. Choose based on your strategy as you gain experience.
Binance Leveraged Trading Fees
Trading fees are 0.1% for both makers and takers, similar to spot trading. However, remember that borrowing interest accrues as soon as an order is placed, even if it isn't filled. Check "Positions" to monitor interest costs.
Frequently Asked Questions
What is a good leverage multiple to start with?
It varies per individual. Generally, start with spot trading (1x leverage) and gradually increase exposure as you become comfortable managing risks.
What is the maximum leverage on Binance?
Up to 5x in cross margin and 10x in isolated margin, though this may vary slightly by cryptocurrency.
How can I avoid liquidation?
Monitor your liquidation price closely and consider adding funds to your position if the market moves against you. Using lower leverage multiples also reduces liquidation risk.
Is leveraged trading suitable for beginners?
It involves significant risk and requires a solid understanding of market dynamics. Beginners should educate themselves thoroughly and start with very low leverage.
Can I use leveraged trading for long-term investing?
While possible, the accruing interest costs make it less ideal for long-term holds compared to spot buying.
Where can I learn advanced strategies?
Many platforms offer educational resources. 👉 Explore advanced trading techniques to deepen your knowledge.
Key Takeaways
Leveraged trading is a powerful tool for amplifying returns and improving capital efficiency. However, it requires careful risk management due to the potential for forced liquidation. Binance's auto-borrow and auto-repay features make the process more user-friendly. Always ensure you understand the mechanics and risks before engaging in leveraged trades.