How Does Leverage in Derivatives Trading Amplify Both Potential Gains and Losses?

Leverage allows traders to open a position that is much larger than their initial capital, known as margin. For example, with 10x leverage, a trader can control $10,000 worth of a cryptocurrency with only $1,000 of their own money.

This amplifies potential gains, as any price movement is magnified by a factor of 10. However, it equally amplifies losses.

A small adverse price movement can result in the complete loss of the initial margin, leading to a liquidation of the position. Leverage turns small price fluctuations into significant profit or loss opportunities.