What is Leverage?

Leverage multiplies position exposure relative to committed capital (margin). It accelerates both gains and losses and introduces specific risks: maintenance margin, liquidation thresholds and financing/funding costs.

Key mechanics

• Notional = Price × Quantity. Margin = Notional / Leverage.
• Maintenance margin: if equity falls below this level, forced reduction/liquidation occurs.
• Funding/financing: periodic payments on perpetuals/CFDs; include them in expectancy.

Practical framework

1. Decide risk in money first, then compute size; do not "use" max leverage.
2. Place hard stops; avoid averaging losers. Reduce size into high‑volatility events.
3. Simulate liquidation price before entry to ensure it is beyond planned stop.

Real Example: Bitcoin Futures with Different Leverage Levels

Scenario: BTC at $50,000, account $10,000, risk 1% = $100.

Option A: 10:1 Leverage (Conservative)

• Want to risk $100 with stop at $49,000 (2% move = $1,000 per contract)
• Notional needed: $50,000 × 1 contract = $50,000
• Margin required: $50,000 / 10 = $5,000
• Problem: Margin $5,000 > Account $10,000 but you only need 0.1 contract to risk $100
• Size calculation: $100 ÷ $1,000 per contract = 0.1 contract
• Actual margin: $50,000 × 0.1 / 10 = $500 (5% of account)
• Result: Safe, plenty of buffer

Option B: 50:1 Leverage (Moderate)

• Same setup: 0.1 contract to risk $100
• Margin: $50,000 × 0.1 / 50 = $100 (1% of account)
• Liquidation check: If BTC drops to $48,500, loss = $150, equity = $9,850 (still above margin)
• Result: Acceptable with proper stop

Option C: 100:1 Leverage (Aggressive — NOT Recommended)

• Same 0.1 contract
• Margin: $50,000 × 0.1 / 100 = $50 (0.5% of account)
• Risk: Small adverse move could trigger liquidation before stop
• Result: Too risky; avoid unless you have specific expertise

Liquidation Calculation Example

Account: $20,000; Position: 1 BTC contract at $50,000; Leverage: 20:1

• Margin used: $50,000 / 20 = $2,500
• Free margin: $20,000 − $2,500 = $17,500
• Liquidation if equity falls to $2,000 (80% of margin = typical broker rule)
• Max loss before liquidation: $20,000 − $2,000 = $18,000
• Price drop that triggers liquidation: $50,000 − ($18,000 / contract value) = $32,000
• Lesson: Always place stops well above liquidation price