Definition
Leverage
Leverage multiplies exposure, not edge. The notional arithmetic, why the liquidation distance shrinks as 1/leverage, and the caps regulators set for retail traders.
Leverage in trading is the ratio of a position's notional size to the margin posted for it: $1,000 of margin at 10× controls $10,000 of exposure. It multiplies every outcome the position produces — gains, losses, fees and funding — by the same factor, and does nothing to the probability of being right. Because the loss that exhausts the margin shrinks as leverage rises, an isolated 10× long is liquidated by roughly a 9.5% adverse move and a 50× long by roughly 1.5%, before fees.
- Also known as
- leverage ratio · gearing · margin multiplier
How it is calculated
Notional = Margin × Leverage
Effective leverage = Notional ÷ Equity
Isolated liquidation distance ≈ 1 ÷ Leverage − Maintenance margin rate
10×: 1/10 − 0.5 % ≈ 9.5 % adverse move before fees
50×: 1/50 − 0.5 % ≈ 1.5 % adverse move before fees
Worked example: $1,000 margin at 10× → $10,000 notional; a 1% adverse move costs $100 (10% of margin), and with a 0.5% maintenance rate the position is liquidated near −9.5%.
Exposure, not edge
Notional equals margin times leverage, and every percentage move in price lands on the notional. At 10×, a 1% move is 10% of margin; at 50× it is 50%. Trading fees and perpetual funding are charged on notional too, so a 0.05% taker fee costs 0.5% of margin per side at 10× and 2.5% at 50× — the cost of holding the view scales with leverage exactly as the payoff does. The expected return of the rule is unchanged by the multiplier; only the variance of the result and the drag on it grow.
Why regulators cap it
The maintenance-margin rate is the buffer the venue keeps for itself, so the move an isolated position survives is roughly 1 ÷ leverage minus that rate. The 2018 ESMA product intervention capped retail CFD leverage at 30:1 for major currency pairs, stepping down to 2:1 for cryptoassets, with each limit calibrated to the volatility of the underlying so that the liquidation distance stays wider than an ordinary daily range. Brunnermeier and Pedersen show the same mechanism at market scale: when funding tightens, leveraged holders are forced to sell into falling prices, which tightens funding further.
How it gets misread
Leverage is read as a return multiplier: "10× means ten times the profit". It is a variance multiplier — the same rule with the same edge loses ten times as much on the same wrong call and pays ten times the fees on every call. The practical error that follows is sizing by leverage ("I trade at 5×") instead of by risk per trade, where the multiplier should be an output of the stop distance and the account risk, not an input. QANTERION sizes its strategies by a maximum-drawdown cap rather than by a leverage number for exactly this reason.
Sources
- ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors — European Securities and Markets Authority
- Margining — Hyperliquid (official protocol documentation)
- Market Liquidity and Funding Liquidity — National Bureau of Economic Research (Brunnermeier & Pedersen), Working Paper 12939
Definitions are educational. Nothing here is investment advice, and no metric described on this page predicts future results.
Definitions are the easy part
Knowing what drawdown means is not the same as having a system that halts on it. QANTERION applies these limits while a strategy runs.