Leverage and liquidation, explained
· 4 min read · Bitlot Team
Perpetual futures let you trade with leverage: a position larger than the money you put up for it. Leverage is a tool, not a free upgrade. It magnifies losses exactly as much as it magnifies gains, and above a certain loss the exchange closes your position for you. This guide explains how that works and how to keep it under control.
What leverage does
When you open a futures position, you post margin, the collateral that backs it. Leverage is the ratio between the position's size and that margin.
With $100 of margin at 10× leverage you control a $1,000 position. A 1% move in the price changes the position's value by $10, which is 10% of your margin. A 5% move is half your margin. Leverage does not change how far the market moves; it changes how much each move means to you.
| Leverage | Position on $100 margin | A 1% move | Move that wipes out the margin |
|---|---|---|---|
| 2× | $200 | $2 | about 50% |
| 5× | $500 | $5 | about 20% |
| 10× | $1,000 | $10 | about 10% |
| 20× | $2,000 | $20 | about 5% |
The last column is approximate: in practice the exchange steps in earlier, as the next section explains.
How liquidation happens
Exchanges require you to keep a minimum amount of margin behind each position, called maintenance margin. When losses eat into your margin until it falls to that level, the exchange liquidates the position: it closes it at the market, and usually charges a liquidation fee on top.
The price at which this happens is your liquidation price, and the exchange shows it on every open position. The higher the leverage, the closer it sits to your entry. At 20× it can be less than 5% away, a distance crypto prices can cover in minutes.
Two details catch people out:
- Liquidation uses the mark price, a fair-value price the exchange calculates, not just the last trade. A sharp wick can still reach it.
- Cross margin shares collateral. In cross mode, other funds in the account can be drawn in to keep a losing position open, so a single bad trade can consume more than its own margin. Isolated margin limits the damage to the margin posted for that position.
Sizing comes first
The most reliable protection is choosing a size you can afford to be wrong about. A common approach is to decide the most you're willing to lose on one trade, as a small share of your account, and work backwards:
- Decide where the trade is wrong, which is where your stop-loss goes.
- Measure the distance from entry to stop, in percent.
- Size the position so that hitting the stop loses no more than your limit.
Leverage then becomes an output of that calculation rather than a dial you turn up. In Bitlot, Auto Trader and copy trading both size trades from limits you set, and you choose the leverage they use.
Why stop-losses matter
A stop-loss closes the position at a level you pick, before the exchange's liquidation price is reached. It turns an open-ended loss into a planned one. Some habits that help:
- Set the stop on entry. Bitlot lets you attach take-profit and stop-loss when you open a trade. In Auto Trader the stop-loss is optional, so turn it on in its settings if you want every position covered.
- Keep the stop well inside the liquidation price. If your stop is beyond liquidation, it will never fire.
- Expect slippage. In fast markets a stop can fill at a worse price than the level you set.
- Don't widen a stop to avoid taking a loss. Moving it further away only increases what you can lose.
A checklist before you trade with leverage
- Do you know the liquidation price of the position you're about to open?
- Is your stop-loss set, and is it well before liquidation?
- If the stop is hit, is the loss one you're comfortable with?
- Are you using isolated margin where it makes sense?
- Is the rest of your account safe if several trades go wrong at once?
Automation can follow these rules consistently, around the clock. It cannot make leveraged trading safe. Start with low leverage and small sizes while you learn how your positions behave.