Leverage and Liquidation: Why Can Your Principal Disappear So Quickly?
Leverage magnifies exposure—and sensitivity to price movements.
In One Sentence
Leverage allows a smaller amount of margin to support greater price exposure. When the margin is insufficient to meet the applicable requirements, the system may forcibly close part or all of the position.
Real-World Analogy—and Its Limitations
It is like using a small cushion to absorb the impact of a much larger object. This analogy cannot be used to calculate the actual liquidation price, which depends on the platform's rules, fees, and the status of the position.
The Correct Concepts
Maintenance margin, mark price, isolated margin versus cross margin, and funding fees can all affect the outcome. Under cross margin, other available balances may be used to support a losing position.
Common Misconceptions
A stop-loss order does not guarantee execution under all conditions; extreme market conditions may involve price gaps, insufficient liquidity, and system delays. Limited price movements in the past are not indicative of the future.
Key Considerations
Do not assess the full extent of the risk based solely on a single liquidation figure displayed in the interface, and do not borrow funds to participate in products you do not understand. Results from simulated demonstrations cannot establish how a strategy will perform in real markets.
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