Leverage, margin and liquidation explained, with examples

Leverage is the feature that makes derivatives powerful, and the one most responsible for losses that surprise traders. Understanding three numbers — initial margin, maintenance margin and liquidation price — removes most of the surprise.

Examples use illustrative prices and a simplified model. Real venues add fees, tiers and mark-price rules, covered at the end.

Leverage

Leverage is the ratio between a position’s notional value and the margin posted to hold it.

A $6,000.00 position held with $600.00 of margin is 10x leverage. Gains and losses are calculated on the full $6,000.00, so a 1% move in price changes the position by $60.00, which is 10% of the margin.

Initial margin

Initial margin is the collateral required to open the position. It is the notional value divided by the leverage.

• Notional value $6,000.00 at 10x → initial margin $600.00
• Notional value $6,000.00 at 5x → initial margin $1,200.00

Maintenance margin

Maintenance margin is the minimum margin needed to keep the position open. It is set by the venue as a percentage of notional value, often lower for small positions and higher for large ones.

At a maintenance margin rate of 0.5%, a $6,000.00 position needs at least $30.00 of margin to stay open.

Liquidation

When losses reduce the position’s margin to the maintenance level, the venue closes the position. That is liquidation. The price at which it happens is the liquidation price.

Worked example: 10x long, isolated margin

• Long 0.1 BTC at $60,000.00
• Notional value: $6,000.00
• Leverage 10x → initial margin $600.00
• Maintenance margin rate 0.5% → maintenance margin $30.00

The position can absorb a loss of $600.00 − $30.00 = $570.00 before liquidation.

A $570.00 loss on 0.1 BTC is a price drop of $570.00 ÷ 0.1 = $5,700.00.

Estimated liquidation price: $60,000.00 − $5,700.00 = $54,300.00, a fall of 9.5%.

Same position at different leverage

Using the same simplified model:

Leverage	Initial margin	Loss absorbed	Estimated liquidation price	Move to liquidation
2x	$3,000.00	$2,970.00	$30,300.00	−49.5%
5x	$1,200.00	$1,170.00	$48,300.00	−19.5%
10x	$600.00	$570.00	$54,300.00	−9.5%
25x	$240.00	$210.00	$57,900.00	−3.5%
50x	$120.00	$90.00	$59,100.00	−1.5%

The pattern is the point: as leverage rises, the distance to liquidation shrinks to roughly (100% ÷ leverage) minus the maintenance margin rate.

For a short position, the logic is mirrored: liquidation happens when price rises by the same proportion.

Isolated vs cross margin

• Isolated margin: each position has its own margin and its own liquidation price. Only that margin is at risk.
• Cross margin: the whole account balance backs open positions. A position can survive larger moves, but a large loss can draw down the entire balance.

What real venues add

A hand calculation is an estimate. The liquidation price on your position screen also reflects:

• Fees, including the estimated fee to close the position.
• Tiered maintenance margin, where larger positions need a higher rate.
• Funding payments, which add to or reduce margin over time; see funding rates explained.
• Mark price, an index-based price most venues use for liquidation instead of the last trade.

Common mistakes

• Reading leverage as risk on margin only. Gains and losses run on the full notional value.
• Adding to a losing position without checking the new liquidation price. It moves.
• Ignoring funding on long holds. Funding slowly changes the margin balance.
• Relying on a stop-limit to prevent liquidation in a fast market. It may not fill; see order types explained.

A good order ticket shows margin and estimated liquidation before a leveraged order is confirmed, labelled as estimates. That is one of the fields covered in why confirm-by-default matters.