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How leverage changes your profit and loss
Leverage lets a trader control more notional exposure—the value of the position—than the margin they post. As a result, a given price move has a larger percentage effect on that margin as leverage rises. The market move itself is not amplified; the position’s exposure relative to the trader’s collateral is.
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Coinbase’s undated product-page illustrations show the arithmetic for a 5% adverse move. They are simplified examples, not expected outcomes or general liquidation thresholds:
| Coinbase illustration | Exposure and move | Illustrated loss |
|---|---|---|
| 5x leverage | $1,000 margin controls $5,000 exposure; a 5% adverse move | $250, or 25% of the margin |
| 10x leverage | $1,000 margin controls $10,000 exposure; a 5% adverse move | $500, or 50% of the margin |
| 20x leverage | $1,000 margin controls $20,000 exposure; a 5% adverse move | $1,000, or 100% of the margin |
These figures exclude fees, funding, slippage, maintenance-margin requirements, collateral rules, and other positions or account effects. Actual P&L and liquidation conditions depend on the contract and venue.
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Size the position before choosing leverage
Start with the amount of account equity you are prepared to lose on the trade, not the maximum leverage a platform offers. A simple planning calculation is:
Approximate notional position size = planned loss budget ÷ plausible adverse price move as a decimal.
For example, a hypothetical $100 loss budget and a 4% adverse move imply $2,500 of notional exposure before accounting for costs. This is a sizing illustration, not a recommended trade: fees, funding, slippage, a gap, or liquidation before an intended exit can make the realized loss larger than the calculation. Reduce the notional size to leave room for those uncertainties.
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- Choose the notional exposure that fits your loss budget, then determine what leverage and initial margin that exposure requires.
- Include trading fees, possible funding payments, and a slippage allowance in the plan.
- Recalculate if the stop distance, collateral, contract, or account mode changes.
- Do not treat a lower displayed margin requirement as permission to increase exposure.
Understand liquidation and maintenance margin
Maintenance margin is the minimum equity or margin the venue requires to keep a position open. If account equity falls below the applicable requirement, the venue may liquidate some or all of the position. That calculation is not simply “the price has reached my entry price minus a chosen percentage.” It can depend on position size, maintenance tiers, fees, mark or index prices, collateral value, and other positions or open orders.
A displayed liquidation price is an estimate, not a guaranteed exit price. Coinbase says its estimate assumes other futures positions and unrealized P&L remain constant; market conditions can change the actual result. Liquidation execution may be less favorable than a trader’s intended exit, and losses beyond posted margin may be possible under some account terms. Read the contract and account terms for the applicable treatment.
Thresholds and processes are venue-specific. For example, Coinbase’s US Derivatives documentation says a 100% margin ratio triggers liquidation of positions and cancellation of open orders for that offering. That is not a universal threshold. Coinbase also documents liquidations that may cancel orders and close futures positions according to liquidity and current market conditions.
Check the contract and collateral rules
Before entering, inspect the rules for the exact contract and account. Requirements can differ by contract and may change while a position is open. Coinbase’s US materials describe intraday-to-overnight margin transitions; Binance’s futures materials describe notional tiers and maintenance-margin mechanics. These are examples of venue-specific rules, not shared industry settings.
- Maintenance schedule: Find the applicable maintenance-margin rate or tier for your notional size, and check whether a larger position moves into a different tier.
- Price used for risk checks: Understand whether liquidation is triggered using a mark price, index price, or another venue-defined measure, rather than assuming it follows the last traded price on the chart.
- Collateral: Check eligible assets, valuation haircuts, conversion rules, and whether collateral value can move with the position.
- Order and liquidation sequence: Learn what happens to open orders and which positions may be reduced or closed first.
- Margin schedule changes: Check for time-of-day or session changes that could raise required margin while you are holding the position.
Choose isolated or cross margin with care
Margin mode affects which collateral may be exposed when a position loses value. Exact mechanics vary by venue, so use the contract documentation rather than relying on the mode’s name alone.
| Mode | How it can affect exposure | What to verify |
|---|---|---|
| Isolated margin | Collateral is allocated to a particular position under the venue’s design, which can limit how much other account collateral is directly assigned to it. | Whether additional margin is automatically added, how liquidation is calculated, and whether losses can exceed the allocated collateral under the account terms. |
| Cross margin | Eligible collateral may be shared across positions, potentially keeping one position open longer while exposing a wider pool of account assets. | Which assets and positions share margin, how gains and losses offset, and any asset-specific limits. Binance says its coin-margined cross-margin mode shares margin only within the same asset type. |
Neither mode removes market risk. Cross margin can spread risk across the account; isolated margin can concentrate it in the allocated position.
Account for funding and contract expiry
Perpetual futures
Perpetual futures have no expiry date. Funding payments help keep a perpetual contract aligned with its reference spot price. Whether a trader pays or receives funding, and how much, depends on the funding rate, position direction, size, and venue rules. Funding can reduce or increase the result of a position held over time, so check the rate and payment schedule rather than treating it as a one-time entry cost.
Dated futures
Dated futures expire. That makes them different from perpetuals, which have no expiry and use funding. The expiry date and the venue’s settlement terms matter when planning how long to hold a dated contract. Roll costs and mechanics vary, so check the specific contract documentation rather than assuming they match perpetual funding.
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Use stop orders as an exit plan, not a guarantee
A stop or take-profit/stop-loss (TP/SL) order can help execute a planned exit, but it cannot guarantee a fill at the trigger price or prevent liquidation. Fast markets, gaps, thin liquidity, slippage, trigger-price rules, and platform interruptions can affect what happens after an order activates.
| Order approach | Main trade-off | Check before use |
|---|---|---|
| Stop-market | Prioritizes submitting a market order after the trigger, but the execution price can differ from the trigger. | Which price triggers it, whether it reduces or closes the intended position, and how execution may behave in low liquidity. |
| Stop-limit | Sets a limit on the execution price, but the order may not fill if the market moves past that price. | Trigger and limit settings, time in force, and what you will do if the order remains unfilled. |
| Venue TP/SL feature | Can bundle or automate exit instructions, but implementation differs by venue. | Whether the order is reduce-only, how it interacts with open orders and liquidation, and the venue’s trigger and execution rules. |
There is no universally best order type established for every contract or market condition. Read the current order documentation for the venue you are using, and do not rely on a stop to compensate for oversized exposure.
Monitor account equity, not only the chart
A price chart does not show the full account-level risk picture. While a leveraged position is open, monitor equity, maintenance margin, margin ratio, open orders, funding, and any upcoming margin transitions. Decide in advance what conditions will lead you to reduce or close exposure; do not wait for a platform warning to make that decision for the first time.
- Recheck margin requirements and liquidation estimates after adding to a position or changing collateral.
- Watch for fast price moves, wider spreads, funding charges, and changes in required margin.
- Consider whether you could manage the position if the platform or your connection became unavailable.
- Keep enough accessible collateral only if you understand how the venue values and applies it; adding collateral can delay liquidation while increasing the amount at risk.
Confirm venue, jurisdiction, and account protections
Crypto derivatives may be unavailable, restricted, or governed by different protections depending on where you live, the product, and your account eligibility. Coinbase’s US derivatives materials and its international perpetual-product disclosures describe different offerings and arrangements; neither should be assumed to apply globally. Verify local availability, liquidation policy, negative-balance treatment, collateral rules, and account terms for the exact product before trading.
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