Leverage lets you control a position larger than your account balance. It is the single feature most responsible for both large gains and total losses in automated trading. Understanding it is not optional if you trade futures.
Margin#
Margin is the collateral you put up to open a leveraged position. If you open a $1,000 position at 10x leverage, you're committing $100 of margin to control $1,000 of exposure. The exchange holds that margin against the trade.
Leverage#
Leverage is the multiplier — 2x, 5x, 10x, and so on. It magnifies the effect of price moves on your margin equally in both directions:
- At 10x, a 1% move in your favour is a 10% gain on margin.
- At 10x, a 1% move against you is a 10% loss on margin.
Leverage does not create edge. It amplifies whatever your strategy already does — including its losses.
Liquidation#
Because your margin is finite, there's a price at which your losses would exceed it. At that liquidation price, the exchange force-closes the position to prevent a negative balance. The higher your leverage, the closer the liquidation price sits to your entry — so a small adverse move can wipe out the position.
Liquidation is the failure mode to design against. See Market Data Explained for how liquidation cascades move markets.
Using leverage sensibly#
- Keep it low. Beginners should treat high leverage as a fast way to lose. Modest leverage (or none) is the safer default.
- Size for the stop, not the leverage. Decide your dollar risk per trade first (see Risk Management Basics), then choose leverage that keeps your liquidation price well beyond your stop-loss.
- Never let leverage set your position size for you. More leverage should mean less notional, not a bigger bet.
If a strategy doesn't specifically need leverage, trade spot instead.