Derivatives foundations · Lesson 3 of 3
Leverage and liquidation
How leverage amplifies and how liquidation can trigger.
9 minute read
Amplification and the trigger
Leverage reduces the margin needed for a given notional exposure, which makes equity more sensitive to price moves in both directions. Liquidation occurs when a position breaches the venue's maintenance or risk thresholds.
The trigger price depends on the contract, margin mode, position size, collateral, fees and the venue's method. A simple estimate is not a reliable prediction of where liquidation will occur.
Key takeaway
Use these concepts to understand the market, not to assume a particular outcome. Always define uncertainty and risk before making a decision.