What Is Perps Leverage?
For example, using $100 in futures buying power at 5x leverage gives you $500 in market exposure (notional).
As your gains and losses are calculated based on the total size of your position, leverage can significantly increase the effect of market movements on your account. This means leverage can magnify both potential profits and potential losses.
How Does Leverage Work?
When opening a Perps position, the amount of leverage you select determines how much market exposure you receive relative to the futures buying power committed to the position.
A simple way to think about it is:
The higher the leverage, the greater your market exposure relative to the amount of futures buying power used.
However, higher leverage also means that smaller price movements can have a larger effect on your position and the funds committed to it.
How Does Leverage Affect Profit and Loss?
Your profit or loss is based on the total value of your Perps position, not simply the amount of futures buying power used to open it.
For example, suppose you expect the price of Bitcoin to increase. You open a Long position in BTCPERP using:
$100 in futures buying power
5x leverage
$500 in total Bitcoin exposure
Because your position’s notional value is $500, changes in Bitcoin's price affect the entire $500 position.
If the price of Bitcoin rises 10%, your Perps position increases by approximately $50.
If the price of Bitcoin falls 10%, your Perps position decreases by approximately $50.
Relative to the $100 in futures buying power committed to the position, that represents a 50% gain or loss.
This is why leverage can amplify your results. A 10% move in the underlying market can have a much larger percentage impact on the funds committed to a leveraged position.
Higher Leverage Means Higher Risk
Increasing your leverage allows you to gain more market exposure without committing the same amount of futures buying power that would otherwise be required for an equivalent unleveraged position.
However, the tradeoff is increased risk.
For example, with $100 in futures buying power:
The underlying market moved the same 5% in each example, but the dollar gain or loss increased as leverage increased.
This makes choosing your leverage an important part of managing the risk of a Perps position.
Leverage and Liquidation
If losses cause your position to meet the liquidation price, your position may become subject to liquidation. Liquidation may result in part or all of your position being closed to reduce risk.
Higher leverage generally leaves less room for the underlying market to move against your position before your available funds are significantly affected.
For this reason, traders should consider not only the potential return created by leverage, but also how much of an unfavorable market movement they are prepared to withstand.
Long and Short Positions
Leverage can magnify the results of both long and short Perps positions.
With a Long position, you generally benefit when the underlying market rises and experience losses when it falls.
With a Short position, you generally benefit when the underlying market falls and experience losses when it rises.
In either case, leverage increases the size of your market exposure and therefore magnifies the effect of price movements on your profit or loss.
Other Costs to Consider
Leverage is only one factor that can affect the performance of your Perps position.
While a position remains open, you may also pay or receive funding payments, depending on the applicable funding rate and the direction of your position.
Funding occurs periodically and can increase or decrease the overall cost of maintaining a position. Payments are also relevant to the notional value of your position, meaning increased leverage causes increased payment amounts.
Trading fees may also apply.
Key Takeaway
Leverage allows you to gain greater market exposure with less futures buying power, but it also increases risk.
For example:
$100 at 5x leverage = $500 in market exposure.
Your gains and losses are based on that $500 position, meaning market movements can have a significantly greater effect on the funds you commit.
Choosing a higher leverage level can increase potential returns, but it can also accelerate losses and increase the likelihood that your position is liquidated if applicable requirements are no longer met.