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High leverage vs low leverage


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High leverage vs low leverage

 
BoulderPJK
Antwerp Belgium
 
Posts: 2 since Mar 2022
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Hi,

I'm a beginning trader on Binance and I'm trying to educate myself on al possible features of binance.
Not really planning on using leverage on my trades (yet), but a question did occur when I was learning about it.

Is there a difference (especially on your PNL) if you put in a high leverage, low margin trade OR a low levrage, higher margin trade?

My question is best asked with an example. Is there a difference between following setups for a trade?:

Trade 1:
Entryprice: 100 USDT
Stop Loss: 95 USDT

Cross
Leverage X2

Margin 50 USDT
Size 100 USDT

Trade 2:
Entryprice: 100 USDT
Stop Loss: 95 USDT

Cross
Leverage X20

Margin 5 USDT
Size 100 USDT


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SMCJB's Avatar
 SMCJB 
Houston TX
Legendary Market Wizard
 
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There could be a margin charge, if so the more margin you use the greater the charge.

Leverage in itself is not a bad thing. How you use it, is what you need to be careful off.

Example

Case A.
I have 100 in cash, I buy something at 100, with noleverage.
I now have 0 in cash, and whatever I bought at 100.
It goes down to 99 and I sell it losing 1.
I now have 99 in cash and lost 1% of my cash on a 1% move in the underlying.

Case B.
I have 100 in cash, I buy something at 100, on 2:1 leverage.
I now have 50 in cash, and whatever I bought at 100.
It goes down to 99 and I sell it losing 1.
I now have 99 in cash and lost 1% of my cash on a 1% move in the underlying.

Not that A and B are the same, even though you used leverage, because your gross exposure is still the same.

Case C.
I have 100 in cash, I buy 2 of something at 100, on 3:1 leverage.
I now have 33 in cash, and two of whatever I bought at 100.
It goes down to 99 and I sell it losing 1 x2 = 2.
I now have 98 in cash and lost 2% of my cash on a 1% move in the underlying.

Case D.
I have 100 in cash, I buy 9 of something at 100, on 10:1 leverage.
I now have 10 in cash, and nine of whatever I bought at 100.
It goes down to 99 and I sell it losing 1 x9 = 9.
I now have 91 in cash and lost 9% of my cash on a 1% move in the underlying.

C and D lose more than A and B because your gross exposure is now greater.

Thanked by:
 
BoulderPJK
Antwerp Belgium
 
Posts: 2 since Mar 2022
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OK, thanks for the information.

Just to be clear, the examples I gave would have the same impact on the wallet if I understand what you are saying.

 
 
SMCJB's Avatar
 SMCJB 
Houston TX
Legendary Market Wizard
 
Experience: Advanced
Platform: TT and Stellar
Broker: Advantage Futures
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,041 since Dec 2013
Thanks Given: 4,375
Thanks Received: 10,192

I think so. Leverage doesn't change your notional PnL, just your percentage PnL.

 
Dreadlight
New York, NY, USA
 
Posts: 5 since May 2022
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Thanks Received: 1

Lots of people use leverage in the wrong way... Leverage is not the ability to buy x100 bitcoins from your deposit, it is the ability to not freeze your funds to buy (like on a spot).
But it is very important to follow risk management, futures are not for beginners.
I believe that trading bots can be a good solution for trading, but you need to choose very carefully.
First of all read trading bot recensions to prevent some scam bots.


 



Last Updated on May 20, 2022


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