RM Mechanics #4 — Understanding Leverage

Leverage lets you open a position larger than the money you actually put up. Trade $1,000 at 10x and you're controlling a $10,000 position. The appeal is obvious: a 5% move in your favor becomes a 50% gain on your capital. The part that gets less attention is that it works in exactly the same way against you.

Here's the mechanic that matters most. Leverage doesn't just multiply your profit and loss. It also decides how small a move it takes to wipe the position out. At 2x, the price has to fall 50% against you before you're liquidated. At 10x, a 10% drop does it. At 25x, just 4%. At 50x, a 2% move is enough, and crypto produces moves that size on a quiet afternoon.

So leverage isn't really a tool for making more money. It's a tool that shrinks your margin for error. The higher you go, the less room the market gives you to be wrong, even for a moment.

That doesn't make leverage unusable. It makes it a decision you size on purpose, like any other risk. Lower leverage keeps your liquidation level far from normal volatility, which is what lets you stay in the game long enough for your edge to play out.

Rule: Before you use leverage, find your liquidation price and ask how ordinary a move it would take to reach it. If the answer is "a normal day," your leverage is too high.

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