Leverage and Liquidations
How far can price move against you before the decision stops being yours?
The idea
Leverage magnifies gains and losses; when collateral falls below maintenance requirements, a venue may forcibly close the position.
In the real world
At high leverage, a modest adverse move can erase posted collateral.
Going deeper
Leverage sets a distance at which the decision stops being yours. At 20x, roughly a 5% adverse move breaches maintenance requirements before fees and funding, which arrive sooner.
The part that catches people is that being right afterwards does not help. Once liquidated the loss is realised and you are not in the position for the recovery, so leverage converts a temporary drawdown into a permanent loss. Liquidations also cluster, because many positions share similar levels, which produces the cascades where price moves far further than the news seems to justify.
Where it stops applying
Leverage is a legitimate tool for hedging and capital efficiency in professional contexts. The risk described here is specific to directional retail positions held without margin to spare.
Why it matters
Leverage sets a distance at which you are closed out regardless of whether your thesis was right.
Try this today
Model the liquidation point and assume gaps and fees can worsen it.
Test yourself
At 20x leverage, roughly how far can price move against a position before maintenance requirements are breached, and why does being right afterwards not help?
Show the answer
Roughly 5%, before fees and funding, which arrive sooner. Once collateral falls below maintenance the venue closes the position and the loss is realised. A later recovery is irrelevant because you are no longer in the trade.
Learn this in the feed Answering from memory, then again days later, is what makes it stick.