1. What is Leverage?
The most common definition of leverage involves maximizing the use of something to its fullest advantage. In the financial context, the definition is similar. Leveraging can optimize profit potential, allowing you to operate with a small amount of capital while controlling a large amount of funds, thereby enhancing your investment value in the market.
The principle of leverage in futures trading is primarily reflected in the margin system. When engaging in futures trading, you don't need to deposit 100% of the capital. Instead, you only need to invest a small amount of funds as collateral based on the futures value, according to a certain ratio. This collateral allows you to participate in the buying and selling of futures, and it's referred to as margin. Leverage significantly enhances the utilization of funds, leading to high returns. But, it also comes with elevated risks. The margin is the amount required for opening a position, while leverage is a multiple of that margin.
The purpose of leverage in perpetual futures trading is that you can hold contracts with a value exceeding your initial investment: Biconomy perpetual futures offer up to 200 times leverage. Biconomy can profit from the price increase or decrease of a corresponding asset by buying and selling perpetual contracts of that asset, without actually holding the asset.
2. The Advantages and Disadvantages of Using Leverage in Perpetual Futures
Using leverage in perpetual futures can lead to higher returns, but it also comes with increased risks. Before using leverage, you should assess your risk tolerance and analyze market risks. If you believe the market outlook is positive, you might consider using leverage to potentially achieve higher profits. However, if the market outlook is uncertain or significantly volatile, using leverage can be a risky proposition.
The higher the leverage, the greater the risk: When using leverage in perpetual futures trading, it's important to pay attention to the leverage multiplier settings. Different futures trading pairs offer different leverage settings. Biconomy perpetual futures offer leverage of up to 200x, allowing you flexibility according to your trading needs. Biconomy ensures the best trading experience for traders while providing risk controls. When trading, you should choose an appropriate leverage multiplier based on your risk tolerance and market conditions. Using excessively high or low leverage can increase trading risks or lead to feelings of anxiety.
3. Examples of Leverage in Trading
Let's say you have a strong conviction that the BTCUSDT perpetual contract price will rise. Currently, you have 100 USDT available for trading, but you want to increase your potential returns. With Biconomy offering a leverage of up to 200x, you only need to use 100 USDT as the margin to trade a position with a value of up to 20,000 USDT.
If, during the trading process, the BTCUSDT perpetual contract price increases by 10%, your position value will be 22,000 USDT instead of 110 USDT. However, if the BTC/USDT perpetual contract price drops by 10%, the total value of the trading loss will be 2,000 USDT instead of 10 USDT.
4. Practical Tips for Using Leverage
When trading perpetual futures, you can:
4.1 Select an appropriate leverage multiplier
The leverage multipliers vary for different perpetual futures trading pairs. You should make your choice based on your own risk tolerance.
4.2 Understand the Position Margin Modes
Different position modes will affect the performance of the position margin in cases of loss or forced liquidation.
4.3 Plan Your Trading Strategy Wisely
When engaging in perpetual futures trading, you should formulate a rational trading strategy based on your investment goals and market conditions. Additionally, you should plan your capital utilization and risk control in accordance with the specific implementation of your strategy. For more on this, you can refer to articles on technical analysis and how to utilize technical indicators in to plan your trading strategy wisely.
4.4 [Estimated Liquidation Price] Calculation Formula
Long Position: Liquidation Price = (Maintenance Margin - Position Margin + Average Entry Price x Quantity x Size) / (Quantity x Size);
Short Position: Liquidation Price = (Average Entry Price x Quantity x Size - Maintenance Margin + Position Margin) / (Quantity x Size)
The displayed estimated liquidation price is the mark price.
5. Conclusion
Using leverage trading does not improve your decision-making process. Whether you use leverage or not, PNL rates remain the same. Leveraged trading simply amplifies profits, which comes with higher risks and potential rewards. This trading approach isn't suitable for everyone. If you intend to use leverage trading, you must ensure that it aligns with your trading style, and have confidence in the strategies you've developed. When engaging in perpetual futures trading, it's essential to select an appropriate leverage ratio and formulate a trading strategy that suits your individual circumstances.
Disclaimer: The materials are not related to the provision of advice regarding investment, tax, legal, financial, accounting, consulting, or any other related services and are not recommendations to buy, sell, or hold any asset. solely provides information, but not financial advice. You should ensure that you fully understand the risk involved before investing.