Why Is Effective Leverage a More Important Metric than Nominal Leverage for ADL Ranking?
Nominal leverage is the leverage chosen by the trader when opening the position. Effective leverage is a dynamic metric that reflects the actual risk, calculated as the notional value divided by the current margin balance (collateral).
It is more important for ADL because it shows the true proximity to liquidation. A trader with low nominal leverage but high unrealized losses may have a higher effective leverage and thus a higher ADL ranking.
