August 5, 2023

5 Reasons Why You Should Avoid Margin Trading and Only Trade Spot

Utilizing borrowed funds, or margin, for trading has led to significant financial losses for many individuals. While precise figures are not available, various regulatory disclosures point to an estimated 70%-90% of retail clients losing money on average when trading margin in traditional stock and commodities markets. In this article, we will explore the reasons why you, whether a retail or professional trader, should consider focusing on spot trading and steering clear of margin-based products.
Coins resembling a candle chart

Reason #1 – Lower Risk

Trading Futures, Derivatives and Margin carries a high risk. With markets’ unpredictability, sudden losses can occur if positions aren’t managed accurately. Futures, being highly leveraged, can quickly magnify profits and losses.

On the other hand, spot trading embodies less risk. The possible loss you stand to incur is the amount you invested. While the profits might be lower than in margin trading, the losses are the same. Spot trading allows you to stay longer in the market, avoiding the destructive ‘get-rich-quick’ mentality that often results in wealth erosion.


Reason #2 – Less Complexity

Margin trading can be a quagmire of complexities. Without a comprehensive understanding of the market, navigating the fluctuating rules and regulations set by exchanges and other parties involved can become daunting. This complexity increases the likelihood of making costly trading errors due to a lack of knowledge and experience.

Contrarily, spot trading is simple and direct: you own the assets you trade. Without needing to grasp the intricacies of leverage limits or how margin applies to a trade, spot trading is a stress-free, easier-to-understand process. Thus, you stand a lesser chance of encountering unnecessary losses.

Human psychology biases can also lead to overtrading, which leads to higher losses and more risk of incurring a margin call. The stress of trading with high leverage can also hurt the trader’s mental well-being.

Reason #3 – Less Volatility

The nature of cryptocurrency is already volatile and sometimes unpredictable. Applying excess margin and watching the market shift against your position can lead to irrecoverable losses. In such a market, unlike forex markets, trading spot gives you enough market movement to make a buck, and there is no need to multiply that volatility by any factor.

In spot trading, you are more in control. You have time to act, and losses are not amplified. There’s no pressure to sell hastily, allowing for measured exit strategies to recover potential losses. You also have the peace of mind knowing that your position won’t be unexpectedly liquidated during flash crashes. These make spot trading a safer & more sustainable option in crypto markets.


Reason #4 – Lower Fees

Margin, derivatives, or futures trading often comes with high fees for additional services like clearing houses. These can eat into your returns, making profit generation challenging.

In contrast, spot trading doesn’t entail fees for holding your coins. The lack of swap fees or interest on loans means you can hold your positions for as long as you deem necessary. This adds to your profit margins, enhancing the appeal of spot trading.


Reason #5 – Abundant Liquidity

Certain trading forms may lack the requisite liquidity, causing large spreads and slippage, potentially leading to significant losses. When you can’t exit a position or add funds to a position with a looming margin call, more losses may pile up.

In spot trading, you enjoy abundant liquidity. This permits execution of your trading strategies without fear of liquidity-based losses, hence spotlighting why spot trading is the superior option.


The Benefits of Sticking with Spot Trading

From this, it is evident that several reasons advocate for spot trading over margin or futures trading. Spot trading promises less complexity, lesser risk, lower fees, and abundant liquidity.

Spot trading, with its simplicity, is an excellent starting point for traders trying to understand market dynamics without additional complexities or risks associated with futures or derivatives trading.

It’s paramount to grasp the differences between these trading types before venturing. Spot trading offers numerous advantages, making it ideal for all kinds of traders and even advanced traders. The risks associated with other forms of trading often outweigh potential rewards. By sticking to spot trading, traders can maximize their success chances and minimize risks.