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A high-leverage user traded 125 times and earned 4% after closing the position, but the assets still lost 8.5%?
Many people will have this question: I clearly earned 4% when trading with high leverage, but why did the assets in the account lose 8.5% in the end? The hidden reason behind this is not complicated, but it is very important for many novices to understand this.
First of all, we have to clarify the basic principles of leverage trading. When trading with 125 times leverage, you are actually using a small part of the principal to control a position that is much larger than the principal. For example, if you have $1,000 and use 125 times leverage, you are actually trading a position of $125,000. Leverage magnifies your gains and also magnifies your risks.
In this case, even if the market volatility is small, the amplitude of price fluctuations will be magnified 125 times. If you make the right direction and the market rises 4%, then the actual gain you get is 125 times 4%, which is a 500% return. However, if the market trend deviates slightly from your expectations, the loss will also be magnified, and the magnitude of the loss may far exceed your initial investment.
Under high leverage, even if you achieve a 4% return, the final account change must also take into account the "compounding effect" brought by leverage. Assuming that you use 125 times leverage, this means that your initial principal is actually "compressed" - that is, if your account loses a certain percentage, your actual principal will be truly touched. For example, when the market fluctuates, even if you temporarily gain 4%, the actual account balance change is calculated according to the leverage multiple. You may have "eaten" part of the profit through other transactions or slippage, or the profit has been "swallowed" due to hidden costs such as handling fees and funding fees, so the final account balance shows a loss.
More importantly, the phenomenon of a loss of 8.5% may be due to forced liquidation during the loss period, or due to the violent market fluctuations that caused insufficient funds to maintain the original margin, resulting in forced liquidation. When trading with high leverage, a little market fluctuation may cause the account to be quickly forced to close. Remember that once the capital position is too large and the leverage is too high, a small market fluctuation will also magnify the magnitude of the loss.
Many people will have this question: I clearly earned 4% when trading with high leverage, but why did the assets in the account lose 8.5% in the end? The hidden reason behind this is not complicated, but it is very important for many novices to understand this.
First of all, we have to clarify the basic principles of leverage trading. When trading with 125 times leverage, you are actually using a small part of the principal to control a position that is much larger than the principal. For example, if you have $1,000 and use 125 times leverage, you are actually trading a position of $125,000. Leverage magnifies your gains and also magnifies your risks.
In this case, even if the market volatility is small, the amplitude of price fluctuations will be magnified 125 times. If you make the right direction and the market rises 4%, then the actual gain you get is 125 times 4%, which is a 500% return. However, if the market trend deviates slightly from your expectations, the loss will also be magnified, and the magnitude of the loss may far exceed your initial investment.
Under high leverage, even if you achieve a 4% return, the final account change must also take into account the "compounding effect" brought by leverage. Assuming that you use 125 times leverage, this means that your initial principal is actually "compressed" - that is, if your account loses a certain percentage, your actual principal will be truly touched. For example, when the market fluctuates, even if you temporarily gain 4%, the actual account balance change is calculated according to the leverage multiple. You may have "eaten" part of the profit through other transactions or slippage, or the profit has been "swallowed" due to hidden costs such as handling fees and funding fees, so the final account balance shows a loss.
More importantly, the phenomenon of a loss of 8.5% may be due to forced liquidation during the loss period, or due to the violent market fluctuations that caused insufficient funds to maintain the original margin, resulting in forced liquidation. When trading with high leverage, a little market fluctuation may cause the account to be quickly forced to close. Remember that once the capital position is too large and the leverage is too high, a small market fluctuation will also magnify the magnitude of the loss.
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