Leverage Trading Explained: Risk and Reward
Leverage is the most misunderstood tool in trading. Used carefully, it lets a small amount of capital participate in larger market moves; used carelessly, it accelerates the path to a blown account.
Is higher leverage better for traders?
No. Higher leverage amplifies both profits and losses and pulls the liquidation price closer to the current price. It suits short-term tactical trades with tight stops, not casual directional positions.
How do I choose appropriate leverage?
Start from risk. Decide how much you can afford to lose and the adverse move that triggers that loss. Position size follows; leverage just becomes the mechanical ratio of size to collateral.
What happens at liquidation?
When the margin ratio falls below the maintenance threshold, the position is closed automatically at market. You lose the remaining collateral on that position (or the allocated margin in isolated mode) plus a small liquidation fee.
Can I reduce leverage on an open position?
Yes. Adding collateral lowers your effective leverage and pushes the liquidation price further away. You can do this without closing and reopening the position.
Does leverage have a cost?
Unlike margin loans on a spot exchange, leverage on perpetuals has no direct interest cost. The cost is embedded in the funding rate, which longs and shorts periodically swap depending on market imbalance.