Margin Trading Definition

Margin trading is when you use borrowed money to make trades that are bigger than what your own cash would allow. You borrow from an exchange or broker through a margin account, which can increase both your possible profits and losses. Margin trading is common in stocks, forex, futures, and crypto markets.

How it works

To start, a trader opens a margin account and puts up some assets as collateral. The broker or exchange then lends extra money so the trader can take a bigger position. The amount the trader puts in at first is called the initial margin. Leverage is the ratio of the total position to the trader’s own money. For example, with 10x leverage, a $100 deposit lets you control a $1,000 position. If the trade goes your way, profits are bigger. If it goes against you, losses are bigger and you might need to add more money. Exchanges set a maintenance margin level. If your account falls below this, you could get a margin call or have your position closed automatically.

Typical actions: long and short

You can use margin trading to bet on prices going up or down. For a long position, you borrow money to buy an asset, hoping its price will rise. For a short position, you borrow the asset, sell it, and try to buy it back later at a lower price to return it and keep the difference. Both strategies use leverage and follow the same margin rules.

Types of margin accounts

There are two common types of margin accounts: cross margin and isolated margin. With cross margin, your whole account balance can support any position, which spreads risk across all your trades. With isolated margin, each position has its own collateral, so a loss on one trade does not affect the others. Traders choose the type based on how much risk they want for each trade.

Risks and costs

Margin trading comes with several real risks and extra costs:

• Price swings are amplified, so small moves can wipe out the trader’s equity.
• Falling below the maintenance margin can trigger a margin call or automatic liquidation.
• Borrowing costs, interest, or funding rates add ongoing expenses while a position is open.
• Some exchanges have rules or fees that affect how and when liquidation happens.
  Anyone using margin should be prepared for quick swings in both profits and losses. 

Who uses margin trading

Margin trading is usually used by experienced traders or those with clear risk plans, since it needs active management and the ability to handle bigger ups and downs. Institutions, professional traders, and some retail traders use leverage to get more exposure without putting in more money. Most beginners avoid margin until they fully understand how it works, what it costs, and the possible risks.

Example

Suppose you have $200 in your account and use 10x leverage. This means you can control a $2,000 position. If the asset goes up by 10 percent, you gain $200, doubling your money. If it drops by 10 percent, you could lose your $200, and the exchange might close your position to get back the loaned money. This example shows how leverage increases both gains and losses.

Common safety steps

Here are some practical ways traders manage margin risk:

• Use lower leverage so price moves have less effect on equity.
• Set stop-loss orders to limit losses.
• Know the exchange’s liquidation rules and fee schedule before opening positions.
• Think of margin as a tool, not a shortcut. Plan your trades and keep a close eye on your positions.