How Does the Leverage Ratio in Derivatives Trading Determine the Trigger Point for a Liquidation Cascade?

The leverage ratio directly determines the sensitivity of a position to price movements. A higher leverage ratio (e.g.

100x) means a smaller percentage price move is needed to wipe out a trader's margin and trigger a liquidation. For example, with 100x leverage, just a 1% adverse price move can trigger a forced liquidation.

In a market with many high-leverage traders, a small downturn can simultaneously trigger a massive wave of these liquidations, instantly creating a cascade as the forced selling pushes the price down further, hitting the liquidation points of the next tier of leveraged traders.