For beginners in futures, I will explain how it works. In this post, I will talk about how to open a leveraged position in Long with isolated margin and a multiplication factor of 10x.
Trading leveraged at 10x means that if you invest $1000, the broker lends you $9000 to trade with $10000 instead of $1000. If there is profit, you return the $9000 and keep all the profit on the $10000, excluding fees. For example, you invest $1000 of your own capital in Bitcoin. When you open your leveraged position at 10x, your position will actually be $10000. If BTC rises by 10%, the profit from the operation will be 10% of $10000, that is, $1000.
In this way, when closing the position, the broker collects the $9000 they lent you plus the fees, passing you approximately $1000 in profit. Since you invested $1000 of your own capital and received another $1000 in profit, your profit will be 100%.
It seems and is really advantageous if the price actually rises. But if the price drops instead of rising, you run a serious risk of losing all your own capital, so care is needed and certainty that there is a high probability of the price rising.
Just as the profit is multiplied by 10, the loss is too. A 10% drop in the price of Bitcoin will be applied to the $10000 of the position and not to your own capital. If you were in the spot market, a 10% drop would imply a loss of only $100 (10% of $1000). But since you are in the futures market, the loss will be 10% of $10000, or exactly the $1000 you invested. So you will lose 100% of what you invested, even though the price only dropped by 10%.
To avoid the total liquidation of your own capital, you will need to increase your own capital margin before the price drops by 10%. By doing this, the liquidation price decreases and you can breathe. However, if the price continues to drop indefinitely, it may become unfeasible to maintain the position, risking significantly your equity.
To reduce the risk, you can use smaller multiplication factors, such as 5x, 4x, 3x, and 2x. This way, for comparative purposes, the liquidation will have a lower chance of occurring:
10x - liquidation occurs when the price drops by 10%
5x - liquidation occurs when the price drops by 20%
4x - liquidation occurs when the price drops by 25%
3x - liquidation occurs when the price drops by 33%
2x - liquidation occurs when the price drops by 50%.
If you open a position for a strong coin when the price is in a firm support region, that is, at a very low value and without prospects of falling further, it may be a good option to enter leveraged with a maximum of 4x. The price would have to drop at least 25% for you to be liquidated.
Important: just like in the spot market, you can close your position at any time, realizing profits when you notice that the market has retraced instead of continuing to rise. You can also jump out before being liquidated, saving part of your own capital. In addition, you can make use of stop triggers, using stop loss (SL) and take profit (TP) for greater protection.
Greetings from Cryptocoin Place