Why Leverage Doesn't Matter

This explanation was generated by ChatGPT

Key Concepts:

• Leverage: This is borrowed money that allows you to control a larger position than your actual capital. For example, 10x leverage means you can control a position 10 times the size of your actual capital.

• Stop Loss (SL): This is a percentage at which you automatically close your trade to limit your losses. For the purpose of this example, it's 3%.

• Risk Amount: For the purpose of this example, you're willing to risk a maximum of $10 per trade which is 1% of your account balance ($1000).

The Example Setup:

• Account balance: $1,000

• Risk per trade: $10 (1% of $1,000 account balance)

• Stop loss (SL): 3% (This assumes you know where your SL should be).

Now, let's see how different leverage levels affect your trading without changing the risk.

Step 1: Calculate Position Size

Since you're risking $10 and your stop loss is 3%, you can use the following formula to determine your position size:

Position Size = Risk Amount / Stop Loss %

In our example, Position Size = $10 / .03 = $333

This means your total position size should be $333 regardless of leverage. Now let's see how leverage works here.

Step 2: Using Leverage to determine margin size

1. With 10x Leverage:

• Position Size: $333

• Leverage: 10x means you're borrowing 10 times your own capital.

• Required Capital (margin): With 10x leverage, the capital you need for this position is: Margin = Position Size / Leverage In our example, Margin = 333/10 = $33.33

This means you only need to use $33 of your own money (out of your $1000 balance) to open this $333.33 position.

• Loss if Stop Loss is hit: If the price drops 3%, you lose $10 (1% of account balance). Since this is within your risk limit, you're fine.

2. With 20x Leverage:

• Position Size: $333.33

• Leverage: 20x means you're borrowing 20 times your own capital.

• Required Capital (margin): With 20x leverage, the capital you need for this position is: Margin = Position Size / Leverage In our example, Margin = $333/20 = $16.65

Now, you only need to use $16.65 of your account balance to control the $333 position.

• Loss if Stop Loss is hit: Again, a 3% price drop will still result in a $10 loss, which fits your risk limit.

3. With 100x Leverage:

• Position Size: $333.33

• Leverage: 100x means you're borrowing 100 times your own capital.

• Required Capital (margin): With 100x leverage, the capital you need is: Margin = Position Size / Leverage In our example, Margin = $333 / 100 = $3.33 So now, you only need $3.33 of your own money to open the same $333.33 position.

• Loss if Stop Loss is hit: Again, a 3% price drop results in a $10 loss.

Step 3: Conclusion

Notice that no matter what leverage you use (10x, 20x, or 100x), the amount you lose if your stop loss is triggered is still $10 (1% of your $1,000 account balance). The only difference is how much capital you need to open the position.

• With 10x leverage, you need $33.33 of your own money.

• With 20x leverage, you need $16.

• With 100x leverage, you only need $3.33.

Why Leverage Doesn't Change the Risk:

You're controlling your risk by setting a stop loss and deciding how much you're willing to lose ($10 or 1% of your account balance). The leverage just determines how much of your actual money you need to put down to control a larger position. Since you're always closing the trade if the price drops by 3%, your potential loss is fixed regardless of the leverage.

Does Higher Leverage Imply Higher Profits?

More leverage allows you to use less margin. It doesn’t necessarily mean greater profits because a 100% win on a $10 margin at 100x with a 1% increase is $10, whereas a 10% win on $100 margin at 10x with a 1% increase is still $10.

Do You Pay Higher Fees with Higher Leverage?

Some people argue that higher leverage means higher fees, but this isn’t entirely true. Fees are based on position size. So if your position size is $1000 = $100 @ 10x or $10 @ 100x, the position size and fees are the same.

If you use the same margin with higher leverage, you will pay more in fees.

$100 @ 10x = $1000 x .08% (Blofin) = $.8

Vs

$1000 @ 100x = $10000 x .08% (Blofin) = $8