How Does Leverage Increase Liquidation Risk?
Leverage magnifies both profits and losses. By controlling a large position with a small margin deposit, a small adverse price movement against the position can quickly wipe out the entire margin.
When the account equity falls below the maintenance margin level, the position is forcibly closed (liquidated) to prevent the trader from incurring a negative balance, thus increasing liquidation risk.
Glossar
Account Equity
Balance ⎊ Account equity represents the total capital an investor holds within a trading account, encompassing both settled funds and the current market value of all open positions.
Small Adverse Price Movement
Definition ⎊ A small adverse price movement refers to a minor, unfavorable shift in the market price of an underlying asset relative to a trader's open position.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Leverage
Amplification ⎊ Leverage, within cryptocurrency, options, and derivatives, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-reward profiles.