Leverage is the concept most people often assume they already understand, right up until a small price move costs them far more than they expected. Here’s what it actually does, and what margin actually is underneath it.
What margin actually is
Margin is the money you use to open a trade. Let’s say you put in $100 into a position, that $100 is your margin.
What leverage does to that money
Leverage is the multiple between your margin and the size of the position it controls. The relationship is simple: position size = margin × leverage. Put in $100 at 5x leverage, and you’re controlling a $500 position. Put in the same $100 at 20x, and you’re controlling a $2,000 position. Your margin, the money actually at risk, hasn’t changed in either case. What’s changed is how much market exposure that same $100 is now standing behind.
One example, both directions
Say you open a $100 margin position on Apple at 5x leverage, giving you $500 of exposure, at an entry price of $200.
Apple rises 4%, to $208. Here’s the calculation: 4% of your $500 position is $20. That $20 gain is measured against your $100 margin, so it’s a 20% gain on the money you actually put in.
Now run the exact same numbers the other way. Apple falls 4% instead, to $192. That’s the same $20, but this time it’s a loss, and it’s a 20% loss on your $100 margin. Nothing about the calculation changed, the only thing that changed was which direction the price moved.
The method, so you can run this yourself
You don’t need to memorise examples, you need the three steps behind them, which work for any margin, leverage, and price move:
- Multiply your margin by your leverage to get your position size. ($100 × 5 = $500)
- Multiply your position size by the percentage the price moved to get your dollar gain or loss. ($500 × 4% = $20)
- Divide that dollar amount by your original margin to get the percentage change on your actual money. ($20 ÷ $100 = 20%)
Run those three steps on any numbers, your own margin, your own leverage, any price move, and you’ll get the real answer every time, not just a sense of “leverage makes it bigger.”
Why higher leverage brings you closer to liquidation
Your margin is a fixed cushion. Leverage decides how much position size that fixed cushion is standing behind, and a bigger position size means the same percentage move is worth more real dollars against that same, unchanged cushion.
Take that same $100 margin. At 5x leverage ($500 position), a 4% adverse move costs you $20, still comfortably inside your $100. At 20x leverage ($2,000 position), that same 4% adverse move now costs you $80, most of your margin gone from one move. Push it slightly further, and there’s nothing left to absorb the loss, that’s the point your position gets liquidated. Higher leverage doesn’t just mean bigger outcomes, it means a smaller price move is enough to use up the entire cushion, which is exactly why the liquidation price sits closer to your entry the more leverage you use. The full mechanics of exactly where that price sits are covered later in this series, but the reason it moves closer is this: same margin, bigger position, less room.
Choosing a leverage level
There’s no leverage number that’s simply correct. Higher leverage means less room before a position is at risk, using less capital to control the same position size. Lower leverage means more room, at the cost of needing more capital to reach that same position size. The right choice depends on how much room you want between your entry and the point where the position is out of your hands.
Where to go next
Margin can also be applied in two different ways, tied to one position only, or shared across everything you have open at once. That choice matters just as much as the leverage number itself.