This is my homework task for steemit crypto Academy week 3 by @besticofinder which is about Spot and Margin trading.
SC from my wazirx account of spot trading
Explain Spot Trading and Margin Trading
Having gained some user experience with poloniex, I'll explain these trading types in reference to poloniex. Before jumping on to spot and margin trading,
we must understand different trading accounts of Poloniex.
There are three accounts which one should be acquainted with before starting trading on poloniex and they are Exchange accout, Lending account and Margin account.
Exchange Account
It is a sort of primary account . When we deposit funds in poloniex, they are credited to exchange account. These funds are used for trading on day to day basis and this type of trading is called SPOT trading.
So spot trading takes place instantly in spot market at spot price. Spot price refers to the existing price in the market. Because of instant nature of trade, funds must be available beforehand in your account. Example, suppose i want to purchase BITCOIN worth of $1000 in spot market. To execute this trade, i must have 1000$ in my exchange account and I'll have to buy at the price that is already existing in the market for order to get filled on spot.
Lending Account
An outstanding feature of poloniex is lending funds Lending account holds funds which you lend to borrowers for Margin trading for which a lender is paid interest. One point to be taken care of, is the fee charged by poloniex. When interest rate is to be set, care must be taken that out of the Interest earned, 15% will be taken by poloniex. So rate has to be set accordingly.
Margin Account
This account is used for margin trading.The funds that this account holds are called collaterals. Funds to this account are transferred from exchange account to be used as compensation to secure loans.
So it is easy to understand Margin trading now. Spot trading and lending are understood now.
Margin trading is a type of trading which is done with the help of burrowed funds. Important point to understand is that, collaterals are not used for margin trading but they are only used as a security deposit. The amount which you burrow is taken from lending account of one who kept funds for lending purpose.
What is meant by POLONIEX POSITIONS?
Position opens only after trading with burrowed funds. As I have not burrowed any funds for trading, so no positions opened. Position can be long or short. Long position is opened on buying with burrowed funds and if we sell, short position will open. If we close our position, the burrowed amount will settle down automatically. Now there are two possibilities, either we are in profit or we are in loss at the time of closing our position. If we are in profit, the profitable amount will be credited to the margin account not the Exchange account but if we are in loss that borrowed amount will be taken from the collateral funds present in Margin account.
Discuss the advantages and disadvantages of Spot Trading and Margin Trading.
Advantages of Spot Trading .
Spot trading is beneficial for beginners as you are trading with the funds that you own and therefore chance of losing funds is proportionate to your affordability.
Orders are instantly executed. You need not wait for order to get filled.
Disadvantages of Spot trading.
- You can only trade as per your budget. Sometimes limited budget limits opportunities that can be bagged because of larger trading amount despite good trading conviction and skills.
Advantages of Margin Traditing.
Margin trading provides opportunity to bag huge profits. With small amount of funds available, good traders can take advantage of leverage and amplify their profits.
Margin trading allows traders to take advantage of timely market opportunities even if you have limited cash in hand.
Margin trading allows for diversification because several positions can be opened with small amount of capital.
Disadvantage of Margin trading.
Risk of losing funds disproportionate to the funds you own.
In case of insufficient margin to support the loss , additional loss in the form of interest has to be kept in mind too. Therefore, it is mandatory to maintain some minimum balance in your account for margin trading.
Thanks @besticofinder
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