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Leverage refers to trading using borrowed funds from an exchange or broker, allowing traders to leverage more than their own capital in the hope of increasing profits. For example, as a novice trader, if we use 10x leverage, if we have $100 in trading capital, we can open a position worth $1,000.
Then, we decide to use all our buying power by opening a long BTC position. If the BTC price rises 10%, we will profit $100. However, if the BTC price falls 10%, we will lose all our capital, or $100. This loss is known as liquidation, or the loss of all capital.
Disadvantages of Leverage
1. Losses are directly proportional to the level of profit.
2. Margin calls, where traders receive a warning from the broker to immediately increase capital.
3. Complexity, requiring skill and a sound risk strategy.
Then, we decide to use all our buying power by opening a long BTC position. If the BTC price rises 10%, we will profit $100. However, if the BTC price falls 10%, we will lose all our capital, or $100. This loss is known as liquidation, or the loss of all capital.
Disadvantages of Leverage
1. Losses are directly proportional to the level of profit.
2. Margin calls, where traders receive a warning from the broker to immediately increase capital.
3. Complexity, requiring skill and a sound risk strategy.
