Leverage in trading: what it is and how much you really risk

What leverage is

With leverage the exchange lends you the rest of the position. You put down a deposit, the margin, and control a larger value. With 5x leverage, €1,000 of margin opens a €5,000 position; with 10x, a €10,000 one.

Every price move acts on the whole position: if the price rises 1%, a €10,000 position gains €100, that is 10% of your margin. If it falls 1%, you lose 10% of it.

When liquidation comes

If the loss eats up almost all the margin, the exchange closes the position on its own: this is liquidation. The price that triggers it depends on the leverage:

These values are indicative: in reality liquidation comes a little earlier, because the exchange requires a minimum maintenance margin, and costs bring it even closer. In crypto a 5% move in a single day is normal.

The costs of leverage

On perpetual contracts, the most common way to trade crypto with leverage, every few hours longs and shorts exchange a payment, the funding. If the market is very unbalanced to one side, keeping a leveraged position open for days can cost a lot. On top of that come the opening and closing fees, calculated on the full value of the position, not on the margin.

The point almost nobody explains

Leverage on its own does not decide how much you risk. That is decided by the stop and the size of the position. If your maximum risk is €10 and the stop is €5 from the entry, the right position is 2 units, whether you use 2x or 10x leverage. The only thing that changes is how much margin stays locked.

Leverage becomes dangerous when it is used to buy more, not to commit less capital: that is where small moves are enough to lose everything.

Isolated or cross margin

• Isolated: each position has its own margin. If it is liquidated you lose that margin, and the rest of the account is untouched.
• Cross: all positions use the same margin, that is the whole account balance. Liquidation comes later, but when it does it can take much more.

For beginners, isolated margin is easier to control: you always know the most you can lose on each position.

The same trade with 2x and 10x leverage

You want to buy €2,000 of a coin, with the stop 5% below the entry.

With the stop in place the loss is the same: €100. With 10x leverage the stop still comes before liquidation, but the safety margin is narrower. Without a stop, or if it were moved, 10x leverage would turn a 10% move into the loss of the whole margin.

Leverage and different markets

Not every market can take the same leverage. Bitcoin moves less than a small cryptocurrency, and a US stock less than both, but it can jump at the open after a piece of news. The more nervous a market is, the lower the leverage should be.

Common-sense rules

• The stop must trigger well before liquidation.
• First decide how much you can lose on the trade, then calculate the size, and only at the end the leverage.
• High leverage and positions held for a long time don't go together: funding adds up.
• Only use capital you can afford to lose entirely.

STA cards indicate a maximum leverage of 10 and always come with a stop: the possible loss is decided before you enter.

Frequently asked questions

This article is for information only and is not investment advice. Trading crypto-assets involves a high risk, including the total loss of the capital used. Numerical examples are for illustration.