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Margin Trading
Margin trading is where a trader uses some collateral to borrow funds to trade an asset. The lender is traditionally a broker, but in our case, the lender is the Predy protocol itself. This enables a trader to leverage their account, trading assets in a size larger than their account. This magnifies gains, but also magnifies losses.
Let's imagine a trader with an account with $1,000 of collateral, using 10x leverage, meaning they are trading $10,000 of an asset. If the asset the trader bought increases in price by 5%, the $10,000 asset is now worth $10,500. The trader has made $500, increasing their account size by 50%! This is great, but of course there is a downside. If the asset the trader bought decreases in price by 5%, the $10,000 asset is now worth $9,500, the trader has lost $500 and their account is down 50%.
In both traditional margin trading, and with Predy, a minimum amount of collateral is required to keep positions open. This is to prevent a trader's account from having losses that are greater than the supplied collateral and causing the lender to be at risk of becoming insolvent. To learn more about how liquidation works on Predy, refer to the Liquidation page.
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