Can somebody explain leverage to me?
Can somebody explain leverage to me?
So, I’m just going to ignore all the condescending comments saying not to do it, it’s not for you etc. But go ahead and make them.
I’ve been playing around with the demo feature on Bitget where you can play at futures with $3000. I’ve made a few extra hundred so far.
I’m just trying to understand all the features, the things like mark price liquidation price etc, but also just how it works in general.
Just looking for someone who actually understands this stuff to explain a few things to me, namely where and what the risks are.
I watched a tutorial video that said it’s safer to use isolated rather than cross at the start. So I’m doing that.
I guess it’s been easier lately because things are generally going up, but even so, I kind of can’t work out how it can go so badly wrong for people. I don’t mean that in an arrogant “I’m so smart” kind of way, I mean I just don’t understand the maths.
So let’s say I open a long on BTC with $1000 at 20x. I put a stop loss at maybe -5%, so I stand to lose $50 max (I’m not sure if that the case if I’m using leverage, but let me know. Also there was a post on here recently from someone who said that they opened it with only 1x and then increased it later, which makes even less sense tbh). Then when the price increases a bit, say by 7% , I move my stop loss maybe 5% above my entry price, so there’s then no risk. Then after that whatever gains made are increased by 20x?
I mean, I just don’t see how that can be true, so I think I’m not understanding something. It’s like you buy something for $1000 and it goes up by $100 and you say to the exchange, nah but I want 20x the profit, and they say ok. I don’t understand where the corresponding risk is. I guess it’s something to do with liquidation price, but if the stop loss is set above that point, then how can you ever lose (unless obviously you pick every single trade badly and keep triggering small stop losses).
Or is it that, if I put $1000 on at 20x leverage then I’m only actually trading with $50, but I still stand to lose $1000.
Honestly, I know I probably sound stupid, but i just don’t get it.
In simple terms, when you trade on a lever, you pay a part of the money and the bank/broker/exchange lends you the rest.
So if you trade on a 100$ on a 10:1 lever, you pay 100$ and borrow 900$ for a total of $1000, that is your position. (10x your 100$).
The liquidation-level for levers is always 100/lever, or in this case 100/10 = 10%
If your 10x lever asset drops by 10%, your $1000 position will only be worth $900, exactly the amount you borrowed. The broker closes your position, takes back the 900$ they lent you and the $100 loss is all yours.
On the opposite case, if the price goes up by 10%, your $1000 position is now worth $1100, you can close the position, return the 900$ and are left with 200$, a 100% gain on your investment.
So in your example, if you open a $1000 position with a 20x lever and it drops 5%, you lost 1000$.