Leverage
Leverage: Leverage means using borrowed funds to open a trading position larger than the money in your account. With 10 times leverage, a deposit of 1,000 controls a position worth 10,000. Leverage magnifies both gains and losses, and if the price moves against you, the position can be liquidated.
How leverage and margin work
The money you put up is called margin, and the platform lends the rest. Leverage is shown as a multiple, such as 2x, 5x or 10x. The higher the multiple, the smaller the price move needed to use up your margin.
Liquidation explained
With 10 times leverage, a 10 per cent move against you can wipe out your margin. Before that point, the platform closes the position automatically, which is called liquidation. Large waves of liquidations can push prices sharply in one direction for a short time.
Why long term investors watch leverage
Even if you never trade with leverage, funding rates and open interest show how much borrowed money is in the market. Crowded leverage has often come before sharp moves, which helps explain sudden swings in price.
Frequently asked questions
Is leverage trading the same as investing?
No. Leverage is a short term trading tool. Many long term investors avoid it because a brief move can close a position before the price recovers.
What is a margin call?
A margin call is a warning that your margin is running low. Adding funds or reducing the position can avoid liquidation, although not always in a fast market.