Why is high leverage so easy to cause a crash?
The leverage discussed here does not refer to the leverage multiple, but to the total position leverage.
For example, in a U-based contract, if you use 10x leverage but only use 10% of the total funds as margin to open an order, it is actually zero leverage.
Similarly, in spot trading, if you set a 20x leverage and use 5% of the total funds as margin to open an order, it is also zero leverage.
Even if it is 100x leverage, using 1% of the total funds as margin to open an order is still zero leverage.
However, the leverage set by the contract and the final total position leverage are different.
When the total position leverage reaches 3 to 5 times, it is already very high. For example, using a principal of 100,000 yuan to open a position of 400,000 yuan is a total position leverage of 3 times.
But in actual operations, many people will choose 10x, 20x, or even 50 to 125x leverage. At this time, they use almost all their capital for margin orders, which is a very dangerous operation. Once the market trend is unfavorable, it is easy to lose money. The total leverage at this time is 10 to 125 times. If the market develops in your direction, it is indeed easy to make money.
Therefore, contract trading is risky. Don't invest all your funds, set aside a part as a chip to recover your investment!
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