Leverage on the Futures Market

LEVERAGE

Leverage is a loan provided by the exchange to a trader to open a trade with a position size that exceeds their own capital.

Simply put, the exchange provides you with a tool that can increase the size of your position.

Example 1:
When opening a position of 1,500 LINK at a price of $10 with x1 leverage, we will use an initial margin of $1,500.

If we decide to use 3x leverage, then the amount we can open a trade for increases to $4,500 with the same required margin of $1,500.

Example 2:
When opening a position of 750 LINK with 3x leverage, the trader uses $1,500 margin, while part of their own funds remains in reserve. This limits risks in case of potential losses.

You can set leverage by manual input or by moving the slider:

NOTE: we do not recommend using high leverage. In futures arbitrage, we use x1 leverage to minimize potential risks.

USING LEVERAGE: RISKS AND OPPORTUNITIES

When working with leverage, it is important to evaluate the liquidation price.

Liquidation price is the price level at which the exchange will automatically close your position to prevent further losses.

This happens when the asset price moves against you so much that your collateral (margin) no longer covers potential losses.

Returning to the COTI example, we opened a position with 1x leverage, where the liquidation price was as follows:

That is, if the price reaches approximately ~$0.19647, our position will be forcibly closed with a 100% loss. In other words, the price must rise by 99% (0.19647/0.09863 ≈ 1.99 or 99%) for our funds to be transferred in favor of the exchange.

NOTES:

1. this liquidation price applies only to 1x leverage and on the Bybit exchange;

2. Liquidation prices can differ across exchanges. Other platforms may set liquidation to occur not after a 99% move as on Bybit, but after an 85% move. Take this into account and always check the liquidation price.

Suppose we opened the same setup with 10x leverage, then our liquidation price would be as follows:

That is, if the price reaches $0.10854, our position will be fully liquidated, or the price needs to move against us by 9.1% (0.10854/0.09940 ≈ 1.091 or 9.1%).

There is a way to reduce the liquidation price when using leverage:

Increase initial margin (collateral): Adding extra collateral to the account allows you to lower the liquidation price, as the exchange factors in the higher balance and liquidation will occur after a more significant price change. This makes the position more resilient, especially when using high leverage:

By increasing the initial margin from $8 to $18, we moved the liquidation price to $0.12103:

That means the price of COTI must move against us — specifically, rise by 21% (0.12103/0.09940 ≈ 1.21 or 21%) — for the position to be forcibly closed and our funds to go in favor of the exchange.

Let’s summarize leverage usage:

Table 1 – Advantages and risks of using leverage

5.4 HOW TO USE LEVERAGE CORRECTLY

Using leverage can be a powerful tool to increase profit — but only with proper risk management:

1. Choose leverage wisely: we recommend not increasing risk and working with 1x leverage, since it reduces risks
   
   FOR BEGINNERS: ENTER YOUR FIRST TRADES ONLY WITH 1x LEVERAGE UNTIL YOU UNDERSTAND YOU ARE READY TO INCREASE IT (for this, complete at least 3–5 profitable trades in a row)

2. Set a stop-loss: always set a stop-loss for every trade, especially when using high leverage, to limit possible losses. You can do this in the settings panel of the open trade:

You can set a stop-loss based on a decrease in ROI (return on investment). In the example above, if the ROI on the position drops to -20%, the entire token position will be closed automatically. That is, in the COTI trade, we will lose 1.59 USDT if its price drops to $0.10139. At the same time, margin will decrease from $18 to $16.41, which is equivalent to a loss of about 10%.

NOTE: when you set a stop-loss or take-profit, pay attention to how the order type is specified. In the example above, the stop-loss will trigger as a market order.

3. Monitor your margin level (collateral): control your margin to avoid liquidation. This is especially relevant if you use high leverage. If necessary, adjust it to avoid liquidation of the entire position.