Leverage, margin and liquidation, with a worked $200 example

Leverage lets you open a position bigger than the money you put up. The money you put up is your margin. At 10x, $200 of margin controls a $2,000 position, so every 1% move in the market is a 10% move in your margin. If price moves about 10% against you, the margin is gone and the platform closes the position. That forced close is liquidation.

The $200 that controls $2,000

Here is a hypothetical trade, with round numbers to keep the math easy. You have $2,000 in a practice account and go long Bitcoin with $200 of margin at 10x leverage. The platform lends you the difference, so your position is worth $2,000. With Bitcoin at $50,000, that buys 0.04 BTC.

Now watch what small moves do to that $200:

• Bitcoin rises 5% to $52,500. Your 0.04 BTC is worth $2,100. Profit: $100, which is half your margin.
• Bitcoin falls 5% to $47,500. Loss: $100. Half your margin is gone.
• Bitcoin falls 10% to $45,000. Loss: $200. Your margin is gone and the position is closed. That is liquidation.

The other $1,800 in the account is untouched, because only the $200 was committed to this trade. More on that below.

In real trading, liquidation comes a bit before the full 10%. Trading fees are charged when you open and close, and some platforms add funding or overnight charges while a leveraged position stays open. Those costs come out of your margin. Most platforms also close you out when margin falls to a maintenance level, not at exactly zero. So a 10x long from $50,000 gets liquidated somewhat above $45,000. How far above depends on the platform's rules.

How far price can move before you are out

Ignoring fees, the move that wipes out your margin is roughly 100 divided by your leverage, in percent:

• 2x: about 50%
• 5x: about 20%
• 10x: about 10%
• 25x: about 4%
• 50x: about 2%
• 100x: about 1%

For a long, the liquidation price sits near entry × (1 - 1/leverage). For a short it flips to entry × (1 + 1/leverage), so a 10x short from $50,000 is liquidated near $55,000. If shorting is new to you, the long vs short guide covers the mechanics.

Now set those numbers against normal market volatility. Bitcoin can move 1% within an hour with no news at all. Gold and the S&P 500 usually move less, but days of 2% or more still happen. At 50x or 100x, ordinary noise is enough to close you out.

There is a second trap. On most platforms, liquidation fires as soon as price reaches the level, not when a candle closes there. A long lower wick can reach your liquidation price, close you out, and snap back up, leaving a candle that closes green while your position is gone.

Isolated margin vs cross margin

With isolated margin, each position gets its own pot of collateral. The margin you assign is the most that position can lose. In the example above, that was $200, and the $1,800 sitting beside it never came into play.

With cross margin, every open position shares your whole free balance as collateral. A losing trade can keep drawing on that balance to stay open, which pushes its liquidation price further away. The cost is that one bad position can drain the entire account instead of just its own slice.

Isolated margin is easier to reason about, which is why it suits people who are learning. You know the worst case before you click. The tradeoff is that an isolated position is liquidated sooner, since it cannot borrow from the rest of your balance.

Some platforms let you add margin to an isolated position that is going against you. That moves the liquidation price away, but look at what you are doing: putting more money into a trade that is already proving you wrong. Most of the time it just makes the eventual loss bigger.

What leverage changes, and what it doesn't

Compare two traders, each with a $2,000 account.

Trader A buys $2,000 of Bitcoin with no leverage. Trader B puts up $200 at 10x for the same $2,000 position. Bitcoin drops 10%. Both have lost $200. The dollar loss per 1% move is identical, because the position size is identical.

The differences are elsewhere. Trader A still holds the position and can decide what to do next. Trader B has been liquidated, so the loss is locked in whether or not the price recovers tomorrow. On the other hand, Trader B kept $1,800 free for other trades. That is the honest case for leverage: it lets you hold the same exposure with less money tied up.

The dangerous use is the other one: holding more exposure than your account can carry. Trader B could have used the full $2,000 as margin at 10x and opened a $20,000 position. Then a 10% move against it erases the whole account.

Be skeptical of returns quoted "on margin". A $100 gain on $200 of margin is a 50% return, which sounds impressive. Measured against the $2,000 account it is 5%, and liquidation was only a 10% move away the whole time.

You can see this math without any leverage. In Alphacent's free simulator, open an unleveraged position and note how many dollars it moves for each 1% the market moves. Free trades are a fixed $1,000, so it moves $10 per 1%. Double that and a $2,000 position moves $20 per 1%, the same as a $200 position at 10x.

Why beginners get liquidated

Most liquidations trace back to a short list of mistakes:

• Picking leverage first. They see 10x available and use it, then work backwards to a position size. The result is a position far bigger than their account can absorb.
• No stop-loss, or a stop past the liquidation price. If liquidation sits 10% away and the stop sits 12% away, the stop never fires. Liquidation becomes the exit, and it is the worst exit available: the full margin plus fees.
• Adding margin to a loser. It feels like giving the trade room. It is usually averaging into a mistake.
• Winning it back. After a liquidation, the urge is to reopen at higher leverage to recover the loss faster. That is how one bad trade becomes an empty account. The trading psychology guide covers this loop in detail.
• Planning on one timeframe, getting stopped on another. A trade idea from the daily chart needs room for daily-sized swings. At 10x, a routine dip on the 1H chart can reach liquidation before the daily idea has time to play out.

A saner order of operations

Leverage is the last number to pick. Here is the order, using a hypothetical $2,000 account:

1. Decide what you are willing to lose on this trade. At 1% of the account, that is $20.
2. Put your stop-loss where the trade idea is proven wrong. Say that is 2% below entry.
3. Work out the position size: $20 divided by 2% is a $1,000 position. The position sizing guide shows this calculation step by step.
4. Only now pick leverage. At 5x, that $1,000 position needs $200 of margin, and liquidation sits roughly 20% away. Your 2% stop fires long before it.

The stop-loss and take-profit guide covers where stops belong.

In Alphacent, leverage up to 10x with isolated margin and liquidation is a Pro feature. It is a reasonable place to see all of this with paper money: open a 10x long on Bitcoin, estimate its liquidation price with the formula above, then watch the 1m chart (also Pro) for an hour and count how close ordinary candles come to it.

Worked examples on this page use a hypothetical paper account and are for learning only, not advice. In Alphacent, free trades use a fixed $1,000 size; choosing your size, stop-loss and take-profit orders, and leverage are Pro features.

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