Leverage, Margin and Liquidation

The short answer

Leverage lets you control a notional larger than your capital. In exchange, the venue requires collateral, and it reserves the right to close your position when that collateral runs low.

The number worth caring about is not the multiple. It is the percentage move that triggers that closure.

Two margins

Initial margin — what you must post to open the position. At 10× leverage, initial margin is roughly 10% of notional.

Maintenance margin — the minimum equity that must remain for the position to stay open. It is lower than initial margin, and often scales with position size: larger positions face higher maintenance requirements, because they are harder to unwind.

The gap between the two is your entire cushion. When equity falls to the maintenance level, the venue liquidates.

Liquidation

Liquidation is not a stop-loss. It is the venue closing your position to protect itself.

• You do not choose the timing.
• You typically pay a liquidation fee on top of the loss.
• It executes into whatever liquidity exists, which in a fast move can be considerably worse than the quoted liquidation price.
• On many venues it is not a clean exit — partial liquidations may occur first, at successive levels.

Roughly, the adverse move that triggers it is:

approximate distance ≈ (1 ÷ leverage) − maintenance margin rate

Illustrative and invented for teaching. At 10× leverage with a 0.5% maintenance rate, liquidation sits around 9.5% away. At 25×, around 3.5%. At 50×, around 1.5%.

Look at the last figure. At 50×, ordinary intraday noise in a volatile market reaches your liquidation. You are not taking a directional position; you are betting that noise happens to go your way first.

Cross versus isolated

Isolated margin ring-fences collateral per position. If it liquidates, you lose that allocation and nothing else. Losses are bounded, position by position.

Cross margin uses the whole account balance as collateral for all positions. Unrealised profits on one position support another, which delays liquidation — and one bad position can consume the entire balance.

Cross margin has legitimate uses for hedged books where positions genuinely offset. For a directional retail position it removes the boundary that keeps a single mistake from becoming an account-level event. Isolated is the safer default, and the one to use until you can articulate precisely why cross is better for a specific structure.

The check to run every time

Before opening any leveraged position:

1. Size the position from your risk limit and your stop distance — the position size formula, unchanged.
2. Compute the liquidation price at the leverage you are using.
3. Confirm liquidation sits beyond your stop.
4. If it does not, reduce leverage until it does.

Step 3 is the one people skip, and skipping it makes the stop decorative. Note what the sequence implies: leverage is an output, not an input. You do not choose a multiple and then find a stop that fits; you choose a stop and let the arithmetic tell you the maximum leverage that keeps it meaningful.

Adding margin to a losing position

Topping up collateral moves the liquidation price further away and buys time. It also increases the capital committed to a position that is already losing — converting a bounded loss into a larger one, on evidence that has turned against you.

It is the leveraged version of averaging down, with a deadline attached. The verdict is the same: if it was not in the plan before entry, it is not a plan now.

What leverage does not do

It does not improve your win rate, your entries or your read on the market. It multiplies the outcome of a process you already have, in both directions, while reducing the noise you can survive.

Applied to a tested process with correct sizing, leverage is a capital-efficiency tool. Applied to make a position feel meaningful, it converts a normal losing streak into a terminal one.