In the cryptocurrency trading world, there are often some incredible phenomena that confuse many investors. Take high leverage trading as an example. A user who used 125 times leverage completed a transaction happily. After closing the position, he found that the profit reached 4%. However, after a closer look at the account assets, he actually lost 8.5%. What happened?
Many beginners, especially those who are new to leveraged trading, will have a big question in their mind: Why did the final account assets decrease instead of increase when the profit was 4% during the transaction, and there was a loss of up to 8.5%? In fact, the hidden doorway behind this is not mysterious, but it is very important for beginners to understand it thoroughly, because it is related to whether they can avoid detours and hidden "pitfalls" in the future trading market.
First of all, we have to understand the basic principles of leveraged trading. When trading with 125 times leverage, it is like holding a magical "magnifying ruler" in your hand. You only need to take out a small part of the principal to leverage a position far beyond the principal. For example, if you have $1,000 in principal, after activating 125 times leverage, you can instantly control a position worth $125,000. Doesn't it feel like you have "superpowers" all of a sudden? But please don't forget that this "magnifying ruler" is a double-edged sword. While magnifying the benefits, it also quietly magnifies the risks by the same multiple.
In this high-leverage situation, even if there is only a slight ripple in the market, the amplitude of price fluctuations will be sharply magnified by this magical 125 times leverage. Imagine if you accurately predicted the market trend and the market rose by 4%, according to the leverage multiple, the actual return you get would be 125 times 4%, which is a staggering 500% return rate. Isn't it tempting? However, the market is unpredictable, just like the weather in June, it changes at any time. Once the trend deviates slightly from your expectations, the loss can be like an avalanche, which is also magnified 125 times. Its tragic degree may be far beyond your imagination, and even make you lose all your money.
Furthermore, under the "magic" of high leverage, even if you are lucky enough to achieve a 4% return, the final presentation of account assets is not that simple, and the "compound interest effect" brought by leverage must be considered. What is the "compound interest effect"? Simply put, when you enable 125 times leverage, your initial principal is to some extent "compressed" into a small "box" - this means that only when the account loss reaches a certain proportion will your original real principal be truly touched. For example, when the market fluctuates, even if you have gained a 4% profit at the moment, the actual change in the account balance is carefully calculated based on the leverage multiple. During this period, perhaps you have inadvertently let part of the profit "slip away" due to losses and slippage in other transactions; or perhaps it is because of hidden costs such as handling fees and funding fees hidden in the dark, like greedy "little monsters", which devour your profits bit by bit, so the account balance that finally appears in front of you will be the eye-catching loss state.
More importantly, the phenomenon of a loss of 8.5% is most likely due to the "nightmare" of forced liquidation during the loss period. You must know that in the battlefield of high-leverage trading, the slightest disturbance in the market may quickly put your account into a desperate situation and trigger the forced liquidation mechanism. Why is this? The reason is that once your capital position is too heavy and the leverage is frighteningly high, the loss will be infinitely magnified even if there is only a small fluctuation in the market. When the loss reaches the margin bottom line, the system will mercilessly force liquidation, making all your previous efforts instantly vanish. Therefore, investors must keep in mind that in high-leverage trading, reasonable control of capital positions and leverage ratios is a necessary skill to survive in this turbulent market.$BTC