How to Use Leverage in Futures Trading: From Basics to Advanced

Core Points

• Leverage is a way to amplify the size of a trading position by using borrowed funds. Through this mechanism, traders can access funds that exceed their initial account balance to trade.
• In the cryptocurrency field, leverage is mainly applied in two forms: futures contracts and margin trading.
• Leverage trading can amplify profits but also double the risks. Especially during periods of increased market volatility, losses can accumulate rapidly. Therefore, it is essential to fully understand how leverage operates before using it.

Basic Principles of Leverage

Leverage allows traders to open larger positions with relatively small initial funds. With this tool, users can borrow funds to trade financial assets, including cryptocurrencies, commodities, foreign exchange, and more. In simple terms, leverage provides traders with additional trading capital.

On some trading platforms, borrowed funds can be up to 100 times the initial balance. The leverage ratio is usually expressed in a ratio format, such as 1:5 (5 times), 1:10 (10 times), or 1:20 (20 times), indicating how many times the initial capital has been amplified.

For example: Suppose there is 100 dollars in the account, but you want to open a position of 1000 dollars in Bitcoin (BTC). By using 10x leverage, the purchasing power of that 100 dollars is equivalent to 1000 dollars.

The Mechanism of Leverage Trading in Futures

In the cryptocurrency market, leverage is mainly used for [Perpetual Futures]( and [Margin Trading](. The leverage mechanisms of the two methods are basically the same, with the main difference being: Margin trading refers to borrowing funds from the exchange to trade specific assets, while futures trading is based on the relationship between long and short positions in the contract.

Initial Margin

To engage in leveraged trading, you first need to deposit funds into your trading account, which will serve as collateral. The amount of funds required to open a futures position is called the initial margin. This amount depends on the chosen leverage multiple and the position size.

For example, if you want to invest $1000 in Ethereum (ETH) with 10x leverage, the initial margin will be 1/10 of $1000, which means you need a margin of $100. If the leverage is changed to 20x, the required margin will be reduced to 1/20 of $1000, only needing $50. But keep in mind that high leverage significantly increases the risk of [liquidation](.

Maintain Margin

In addition to the initial margin, traders need to maintain a margin threshold to keep their positions. When the market moves against them and the margin balance falls below the maintenance margin level, additional funds need to be added to avoid being liquidated.

In short, initial margin is the amount of funds required to open a futures position, while maintenance margin is the minimum capital requirement to maintain an open position.

Leveraged Trading Practical Example

For beginners, a reminder: a long position is based on the expectation of an asset price increase, while a short position is based on the expectation of a price decrease. Leverage allows traders to buy and sell assets based on collateral funds (rather than actual account funds) - even opening short positions without holding the underlying asset and profiting when the price drops.

Long Position Leverage Example

Assuming you want to open a $10,000 BTC long position with 10x leverage, you need to provide $1,000 as collateral.

Bullish Scenario: If the BTC price rises by 20%, the net profit will be $2000 (after fees), far exceeding the $200 profit from trading without leverage.

Downtrend Scenario: If the BTC price drops by 20%, the position incurs a loss of $2000. Since the initial margin is only $1000, a 20% drop could directly trigger liquidation. Sometimes, liquidation may even occur with just a 10% decline, with specific values varying by trading platform.

To avoid liquidation, it is necessary to add funds to the account to increase the margin. Make sure that the account balance exceeds the maintenance margin level. Most platforms will send a margin call notice before liquidation, but actively monitoring the position status is still important. Using [stop-loss order] ( can also provide effective protection.

Margin Example for Short Position

When opening a BTC short position with $10,000 and 10x leverage, you can choose to borrow BTC and sell it (margin trading) or short it through a futures contract (futures trading). In both cases, a collateral of $1,000 is used.

Taking margin trading as an example: Suppose the current BTC price is $40,000, borrowing 0.25 BTC and selling it for $10,000.

Price Drop Scenario: If BTC falls to $32,000 (down 20%), you can repurchase 0.25 BTC for $8,000, leaving you with $2,000 (after fees) as profit after repaying the loan.

Price Increase Scenario: If BTC rises to $48,000 (an increase of 20%), an additional $2,000 is needed to repurchase 0.25 BTC. When the account balance reaches $1,000, the position will be liquidated. To avoid this, more funds must be added to increase the collateral until the new liquidation price is reached.

Why Traders Use Leverage

Traders use leverage to increase the size of their positions and enhance profit potential. However, as mentioned above, this also means that losses can be amplified just as much.

Another reason to use leverage is to improve capital efficiency. Instead of maintaining a 2x leveraged position on one platform, you can choose 4x leverage to maintain the same position size but with less collateral. This way, the remaining funds can be used for other strategies—such as trading other assets, [participating in staking](, or providing funds to DeFi liquidity pools, etc.

Risk Management in Margin Trading

High leverage requires less collateral but significantly increases liquidation risk. The higher the leverage ratio, the stronger the sensitivity to price fluctuations. Extremely high leverage means that even a 1% price fluctuation can lead to substantial losses.

Using lower leverage can effectively prevent severe losses caused by trading mistakes. This is also why many cryptocurrency trading platforms impose leverage limits on new users.

Risk Management Tools such as [Stop Loss Order]( and [Take Profit Order]( can minimize losses and lock in profits. A stop loss order can automatically close a position at a specified price when the market is unfavorable, while a take profit order automatically closes a position when profits reach the target.

Important reminder: Leverage trading can exponentially amplify both gains and losses. This trading method carries extremely high risks, especially during periods of volatility in the cryptocurrency market. Trade cautiously and carefully assess the risks before considering the use of leverage. Only trade with funds you are willing to lose, particularly when using leverage. You must fully understand the trading products before taking risks.

Summary

Leverage provides the opportunity to start trading with a smaller initial investment and achieve higher profits. However, during market volatility, especially when using 100x ultra-high leverage, the risk of rapid liquidation is substantial. It is important to maintain a cautious attitude while trading and to carefully assess the risks before considering the use of leverage.