Leverage amplifies both gains and losses. Understanding how leverage and margin work is essential for trading perpetual contracts safely. This guide covers everything you need to know about leverage mechanics, margin requirements, and how to avoid liquidation.

Most traders understand leverage conceptually but don't understand the mechanics. They see "10x leverage" and think it's safe. They don't calculate where they'll get liquidated. This guide fixes that.

What is leverage?

Leverage lets you control a larger position than your capital would normally allow. 10x leverage means $1,000 controls $10,000 of exposure.

Key point: Your profits and losses are calculated on the full position size, not your margin. This is why leverage amplifies both gains and losses.

Understanding margin

Types of margin

Margin is the collateral you put up to open a leveraged position. There are several types:

• Initial margin: What you need to open the position. For 10x leverage, this is typically 10% of the position size (plus a small buffer for fees).
• Maintenance margin: The minimum required to keep the position open. This is usually 0.5-2% of the position size, depending on the exchange.
• Isolated margin: Margin allocated to a specific position. If that position is liquidated, only that margin is lost.
• Cross margin: Margin shared across all positions. One position can use margin from another, but liquidation risk is shared.

Margin ratio

Margin ratio = (Margin / Position Value) × 100%

When your margin ratio falls below the maintenance margin requirement, liquidation occurs. Most exchanges show your margin ratio in real-time. Keep it well above the maintenance level.

Leverage levels and risk

Common leverage levels

• 2-3x: Conservative. Good for beginners. Wide liquidation buffer.
• 5-10x: Moderate. Most common for experienced traders.
• 20-50x: Aggressive. Requires precise risk management.
• 100x+: Extremely risky. Not recommended for most traders.

Liquidation by leverage

Higher leverage = closer liquidation = less room for error:

• 5x leverage: Liquidation at ~19% adverse move
• 10x leverage: Liquidation at ~9.5% adverse move
• 20x leverage: Liquidation at ~4.5% adverse move
• 50x leverage: Liquidation at ~1.5% adverse move
• 100x leverage: Liquidation at ~0.5% adverse move

Margin calls vs. liquidation

Margin call

A margin call is a warning that your margin ratio is getting low. Some exchanges will notify you when your margin ratio approaches the maintenance level. This is your chance to add more margin or close the position.

What to do: If you get a margin call, you can:

• Add more margin to the position
• Close the position to realize the loss
• Close other positions to free up margin (if using cross margin)

Liquidation

Liquidation occurs when your margin ratio falls below the maintenance requirement. The exchange automatically closes your position to prevent further losses. You lose most or all of your margin.

Important: Liquidation is automatic and immediate. You don't get a warning. Once your margin ratio hits the maintenance level, your position is closed.

Calculating liquidation price

Liquidation price depends on:

• Entry price: Where you opened the position
• Leverage: Higher leverage = closer liquidation
• Position side: Long or short (opposite directions)
• Maintenance margin: Exchange-specific (typically 0.5-2%)
• Trading fees: Which reduce your margin

For a long position with 10x leverage and 0.5% maintenance margin:

• Initial margin: 10% of position value
• Liquidation occurs when margin = 0.5% of position value
• You can lose 9.5% of your margin before liquidation
• Price needs to drop ~9.5% from entry (accounting for fees)

Use our Liquidation Distance Tool to calculate your exact liquidation price.

Best practices

Key takeaways

Frequently asked questions

What's the difference between isolated and cross margin?

Isolated margin is allocated to a specific position. If that position is liquidated, only that margin is lost. Cross margin is shared across all positions. One position can use margin from another, but liquidation risk is shared. Use isolated margin when learning or testing strategies.

Can I get liquidated if price moves in my favor?

No. Liquidation only happens when price moves against you. For longs, liquidation occurs when price drops. For shorts, liquidation occurs when price rises.

What's the safest leverage to use?

There's no universal answer, but 3-5x leverage is generally considered safe for most traders. It provides enough amplification without excessive liquidation risk. Higher leverage should only be used by experienced traders with precise risk management.

How do I calculate my exact liquidation price?

Use our Liquidation Distance Tool. It accounts for entry price, leverage, position side, maintenance margin, and fees to give you the exact liquidation price.

What if price gaps through my liquidation price?

If price gaps through your liquidation price, you'll be liquidated at the liquidation price, not the gap price. However, if the gap is very large, you might face additional losses from the liquidation process itself (liquidation fees, etc.).

Tools to help

Use our Liquidation Distance Tool to calculate exactly where you'll get liquidated. Our Time-to-Liquidation Visualizer shows how price movement and funding costs reduce margin over time.