Hello Everyone. This is SK, a SnapEx senior analyst. We have prepared a series of lesson regarding trading basics and fundamentals. We will upload those series every Friday afternoon starting from simple terms to more advanced terminology and techniques to help you all with successful trading.
For today's lesson we will breifly look in to some of the basics to help you understand what each terminology means.
First of all, what is Simple Contract Trading?
Much like contract, SCT is a form of derivative trading where it enables you to speculate on the rising or falling prices of fast moving market.
Therefore you can Long(Buy) or Short (Sell) in terms "Contract" speculating on future price differences, but not as real asset traded.
Some of our clients have asked, "what is leverage?"
Simply, leverage effect is a result of Margin Trading, where in margin trading you only need to secure a proportion of your entire volume to "guarantee" your contract is valid.
For example, assuming BTC/USDT is at 7,000, and you want to Long 1 BTC right now, how much money do you need to open that trade under 100x leverage?
Your Volume = 1 BTC = 7000 USDT
At 100x leverage, you need 1% of the volume to secure your trade to be valid, therefore:
7000 USDT * 1% = 70 USDT.
So, in order to Long 1 BTC at the market with 100x leverage, you will need 70 USDT to open the trade.
Then how about with 50x leverage?
At 50x leverage, you need 2% of the volume to secure your trade to be valid, therefore:
7000 USDT * 2% = 140 USDT.
Then how about with 10x leverage?
At 10x leverage, you need 10% of the volume to secure your trade to be valid, therefore:
7000 USDT * 10% = 700 USDT.
Now, for ease of explaining leverage, we have calculated the leverage effect from the total volume's stand point, but what about from your margin's stand point?
In other words, how big of volume can I open with 100 USDT?
Margin = 100USDT
At 100x Leverage:
100 USDT * 100x Leverage = 10,000 USDT -> this is the total amount of money you can buy the BTC with
If BTC/USDT is at 7,000, then:
10,000 USDT / 7000 USDT = 1.4285 BTC
Therefore, with 100 USDT at 100x Leverage, you can Long or short 1.4285 BTC
With 50x Leverage?
100 USDT x 50x Leverage = 5,000 USDT
5,000 USDT / 7,000 USDT = 0.7142 USDT
Therefore, with 100 USDT at 50x Leverage, you can Long or short 0.7142 BTC
Now you may ask, "Why would I even need Leverage? what difference does it make?"
Simply, with your margin being the same, higher leverage offers higher total volume. With previous example, using 100 USDT as your margin you could trade:
Assuming BTC/USDT is now at 7000
10,000 USDT or 1.4285 BTC at 100x Leverage and 5,000 USDT or 0.7142 USDT
If Price changes to 7030, what will happen each trade?
With 100x Leverage, your profit/loss will be: 1.4285 * (7030-7000) = 42.355
With 50x Leverage, your profit/loss will be: 0.7142 * (7030-7000) = 21.426
Since, with 100X you have traded higher volume therefore it is more "sensitive" to market changes thus offering higher return in this case.
Please remember that, when you are facing a loss, with higher leverage your loss will increase more rapidly compared to that of 50x leverage as well.
To sum up, Higher Leverage means higher risk in return for higher PROFIT or LOSS.
When the Market volatility is high, meaning there is continuous up and down market movement, generally higher leverage is not advised to use.
Clients are advised to be aware of what leverage is and use it accordingly to suit your need.