What leverage means in trading

Leverage means the cash posted for a position is only a fraction of the position's full price. The position can then be larger than the cash. A price move changes the larger position, so the same move adds or subtracts more from the cash than it would have on a fully funded position.

A fraction of the price

The CFTC customer advisory on virtual currency trading risks describes the mechanism in futures accounts. Participants often fund a contract at a fraction of the underlying price. The advisory says that fraction creates leverage, and that leverage makes a change in the cash price more significant. When the price moves in the customer's favor, the profit is larger relative to the cash. When the price moves against the position, the customer can be asked to add cash or to close, and the loss can be larger than the cash that was posted at the start.

A fully funded purchase is the comparison case. You pay the whole price. If the price falls, you can lose what you paid. You do not lose a multiple of it from that one purchase, because you did not control extra units with borrowed or margined exposure.

The same fall, two losses

These figures are a worked example, not a recorded run. The price starts at 100 and falls to 60. That is a fall of 40 points per unit. The cash posted in both cases is 100.

One fully funded unit costs 100. At 60 it is worth 60. The loss is 40. The cash covered the whole unit, so the loss is 40 of the 100.

Three units have a full price of 300. Posting 100 against that position is three times the cash relative to one fully funded unit. The same 40 point fall costs 40 on each unit, which is 120. The loss of 120 is larger than the cash of 100.

The price move did not change. The number of units did. That is what leverage changes about the result.

What Tradee does with size

Tradee does not borrow, and a bot has no leverage multiple. The modeled quantity comes from the capital assigned to the run and from the sizing rule on that capital. Size the loss before the trade is the version that starts from an accepted dollar loss and a stop distance.

Tradee also does not send the position to an exchange. A modeled loss is the price move times the modeled quantity. It is not a margin call, and it is not an exchange liquidation. Someone who runs a receiver and then chooses leverage at a venue is outside that modeled book. The 120 figure above is the arithmetic of three units. It is not a Tradee setting.