If you’re new to trading, you’ve likely heard the word leverage floating around, but what is leverage in trading, really? In this beginner guide, we’ll break it down simply, explain how trading leverage works, and give you real examples to help you understand both the potential rewards and the risks.
What Is Leverage in Trading?
Leverage in trading means using borrowed capital to increase the size of your position. Instead of only trading with the money you have in your account, leverage allows you to control a larger position size.
If you have $10 in your account and use 10x leverage, you’re actually trading with $100. That means you can earn bigger profits but also risk bigger losses.
So, with leverage, we can trade more contracts than we have for larger position sizes.
How Trading Leverage Works (With Examples)
Let’s look at an easy breakdown:
- No Leverage (1x): You have $1,000 in your account. You open a $1,000 trade. If the price goes up 1%, you make $10.
- With Leverage (e.g. 100x): You have $1,000 and use 100x leverage, giving you a $100,000 position. If the price increases by 1%, you double your account. But if the price moves against you by 1%, you could lose the entire $1,000.
Understanding the impact of leverage on your liquidation level is essential for effective risk management. Here’s a quick overview of how leverage affects your liquidation price:
- 10x Leverage: Your position will be liquidated after a 10% move against you.
- 20x Leverage: A 5% move against your position leads to liquidation.
- 50x Leverage: A 2% price move against your position leads to liquidation.
- 100x Leverage: Just a 1% movement against your trade will result in liquidation.
The higher the leverage, the less room you have for price fluctuations. This is why beginner traders are encouraged to start with low leverage and use stop losses wisely.
Liquidation can even happen before the price drops fully by the percentages mentioned, as it also considers the maintenance margin, which is the minimum balance required to keep your positions open.
That’s why high leverage is risky.
Quick leverage and position size examples
- How much is $1000 with 10x leverage? → $10,000 position size
- How much is $100 with 10x leverage? → $1,000 position size
- How much is $10 with 20x leverage? → $200 position size
- How much is $10 with 10x leverage? → $100 position size
What Happens If You Lose a Trade with Leverage?
When trading with leverage, small price moves can lead to significant losses. If the price hits your liquidation price—which happens quicker the more leverage you use—you can lose your entire position. This is why it’s crucial to always use a stop loss and never treat liquidation as your exit strategy.
Losses are a natural part of the trading journey. But when we trade with leverage, both risk and reward are amplified. That’s why it’s essential to always use a stop loss and be clear about your personal risk tolerance.
What Is a Good Leverage for Crypto Trading?
If you’re a beginner, stick to low leverage. The general recommendation is:
- 1x to 5x leverage is considered safe and gives you more room for error.
- Anything above 10x leverage should be used only by experienced traders.
For example, if you’re trading with just $100, $1,000 or $10,000, leverage between 2x and 5x is a better balance between risk and potential return.
Isolated vs Cross Leverage: What’s the Difference?
When using leverage on platforms like Bybit, you’ll have two options:
- Cross Leverage: Uses your entire account balance as margin. If your trade is liquidated, you could lose everything.
- Isolated Leverage: Only risks the specific amount you put into the trade. If the trade fails, you lose that amount, not your whole account.
For beginners, isolated leverage is the safer option.
Hedging with Leverage
Leverage can also be used for hedging. Let’s say you hold $10,000 worth of Bitcoin offline and only want to keep $2,000 on the exchange. With 5x leverage, you can still trade a $10,000 position using just $2,000, allowing you to hedge your offline holdings without exposing all your funds.
This is one of the smartest ways to use leverage in crypto.
Key Takeaways for Safe Leverage Trading
- Use isolated margin to limit losses
- Always set a stop loss at your invalidation level, not at liquidation
- Avoid high leverage unless you fully understand the risks
- Use leverage as a tool, not a shortcut to fast profits
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