**Leveraged Trading**

Let’s revisit some basics of leveraged trading.

A common misconception is that higher leverage equals more profit or loss.

In reality, that’s not the case.

Leveraged trading essentially means you put down a portion of a position's value as collateral and effectively "borrow" the rest.

The important relationship is as follows:

More margin = more collateral = less leverage.

Less margin = less collateral = more leverage.

The position size ultimately determines how much you will earn or lose, while leverage determines the liquidation price (as a function of how well the position is collateralized).

Back to our initial example:

Petya has a position size of $10,000 with 10x leverage.

Vanya has a position size of $10,000 with 5x leverage.

They make the same trade, and the price moves 5% in their favor.

Question: Who makes more money?

Answer: They make the same amount of money because their position sizes are identical.

The difference is that Petya had a closer liquidation price because he put down less margin = higher leverage, while Vanya had a further liquidation price because he put down more margin = lower leverage.

Therefore, the position size is the key variable, and leverage essentially determines your capital efficiency, i.e., how many dollars you need to put up for a given position size.

Hence, all these “leverage reduces counterparty risk” claims: if you typically trade with a position size of $50,000, you can achieve this by holding only $10,000 on the exchange and using 5x leverage. This way, if the exchange goes bankrupt, you lose $10,000 instead of the full $50,000.

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