Leverage is one ratio: the value of your position divided by the margin you put behind it. Everything else on a leveraged trade comes from that ratio: how much margin you tie up, what a price move makes or loses you, and the price at which the position gets liquidated. This post works all four out on one example. The example is a USDT-margined perpetual with isolated margin, which is the default setting on most crypto exchanges.
Position value and margin
A position's value (its notional) is quantity times price. Margin is the position value divided by the leverage:
position value = quantity × price
margin = position value ÷ leverage
leverage = position value ÷ margin
Say you open a 10x long on BTCUSDT at 100,000 with 500 USDT of margin. The position is worth 500 × 10 = 5,000 USDT, which is 5,000 ÷ 100,000 = 0.05 BTC. Opening the same 0.05 BTC at 5x would tie up 1,000 USDT of margin; the position is the same, only the margin set aside for it changes.
How PnL is calculated
PnL comes from the quantity and the price change, not from the margin:
long PnL = quantity × (exit − entry)
short PnL = quantity × (entry − exit)
If the price rises 2% to 102,000, your long makes 0.05 × 2,000 = 100 USDT. Against 500 USDT of margin that is 20%. If it falls 2%, you lose the same 100 USDT, again 20% of the margin. PnL as a share of margin is the price move times the leverage: 2% × 10 = 20%.
That multiplication is what makes leverage dangerous. But note that leverage does not change the dollar PnL of a position of a given size. A 0.05 BTC position loses 100 USDT on a 2% drop at 2x and at 50x alike. Leverage only changes what share of your margin those 100 USDT are. How to size a position from the risk you accept is in the position sizing with leverage post.
How the liquidation price is calculated
With isolated margin, only the margin you set aside stands behind the position. As the price moves against you, what is left of that margin shrinks. When it falls to the maintenance margin, the exchange closes the position; that is liquidation. The maintenance margin is a small percentage of the position value, and it varies between exchanges and in tiers by position size.
Leaving fees and funding out, with a maintenance margin rate of m, the liquidation price is:
long liquidation price = entry × (1 − 1 ÷ leverage) ÷ (1 − m)
short liquidation price = entry × (1 + 1 ÷ leverage) ÷ (1 + m)
In the example, entry is 100,000, leverage is 10, and take the maintenance rate as 0.5%. The long is liquidated at 100,000 × 0.9 ÷ 0.995 = 90,452, which is 9.55% below entry. The same position as a short would be liquidated at 100,000 × 1.1 ÷ 1.005 = 109,453, 9.45% above entry.
The higher the leverage, the closer liquidation comes to your entry. For a long opened at 100,000 with a 0.5% maintenance rate:
| Leverage | Liquidation price | Distance from entry |
|---|---|---|
| 5x | 80,402 | 19.6% |
| 10x | 90,452 | 9.55% |
| 20x | 95,477 | 4.52% |
| 50x | 98,492 | 1.51% |
| 100x | 99,497 | 0.5% |
As a rough rule, the distance to liquidation is a little less than 100% divided by the leverage. At 20x the price does not need to move 5%; 4.5% is enough.
Your real liquidation price will differ a little from this table. Exchanges tier the maintenance rate by position size, fees and funding come into it, and each exchange applies the formula under its own rules. The formula is enough to understand how it works; the number to go by when you place the order is the liquidation price on the exchange's order screen.
Cross margin works differently
With cross margin, all the free balance in your account stands behind the position. The liquidation price is much further away for that reason, and the cost is large: one position that goes badly can use up your whole balance before it is liquidated. With isolated margin, the most you can lose is the margin you set aside for that position.
Your stop has to come before liquidation
The practical result of these numbers is simple: your stop has to sit before the liquidation price. If you go long at 100,000 with a stop at 98,000, at 50x liquidation comes at 98,492 and the stop never fires. The position closes by liquidation and you pay a liquidation fee on top. At 20x the same stop sits well ahead of liquidation.
The free position size calculator finds the right size for your stop distance and account: enter the entry, the stop, the amount you will risk and the fees, and pick the leverage last.
Connect your futures trades to a free Viktury journal and see each trade's PnL with its fees.
What Viktury does with it
When you add a Binance account in Viktury, your futures trades come in with the fees and funding they paid. If you add the stop and risk you planned to a trade, Viktury shows the result in R, so you can see which trades lost more than you planned. For how to read R, see the R-multiples post.
Open a free Viktury account and connect your exchange.