The Dip Keeps Dipping

🔹 Crypto – Fox

📈 Equities – Donny

# Let's talk Leverage.

Leverage. It's all too often misunderstood and is the culprit behind many blown-up accounts. In this episode, we'll talk through how to use leverage like a professional.

## 1. Leverage ≠ Size

The most common misunderstanding with leverage is that it is in any way related to how much money you make or lose. High leverage must mean a high risk, high reward, right? Incorrect. The amount of risk you take and your Position Size determine the money you make on any given trade.

If you Long 1 BTC on 2x leverage, and then Long 1 BTC on 100x leverage, the position size doesn't change, and neither do your profits/losses. So what does leverage do? It's simple: It reduces the amount of money needed to open a position.

At $100,000 per BTC, we'd need to lock up $50,000 to take a 1 BTC long position on 2x; however, on 100x, we'd only need to lock up $1,000.

The power of leverage lies not in its ability to increase your risk, but in its ability to reduce it. You don't need to hold everything in one place; you could use leverage to free up your money while still taking the same trade.

Another benefit lies in the ability to trade on low timeframes. On a scalp trade a massive move might only be 0.5% in total, but using leverage we could increase our position size using a lower amount of capital to trade that short term move like it was a bigger one, enabling us to profit immensely from low timeframes, rather than having to wait days or weeks for our trades to profit.

## 2. The Risk

The risk is twofold with leverage, but both boil down to user error. The first risk is simple: your ooga booga brain thinks it's a good idea to bet way more money than you should on a trade (i.e., Poor Risk Management).

You think that just because you can trade with your $10K account like it is $100K, that you should. This will very quickly lead to a portfolio that's down -90%, but ya know, you do you. That simple fact is risk #1: your gambling addiction can quickly become your downfall with leverage. Note: If you're prone to gambling, avoid using leverage altogether.

The second risk is what we call 'Liquidation', and to understand that, you need to understand margin. We just mentioned earlier that leverage changes how much money you lock up in a trade, right? Well, that money is your margin. When your position is red enough that your margin nears $0, that's when you get liquidated.

Your position is forcibly closed, and the exchange takes a fat fee. This is what exchanges love; it's why they offer such insanely high leverage. On 100x leverage, less than a 1% move will liquidate you and take your money. So why would you use 100x leverage? You don't, there is not a single good reason to use leverage above 10-20x ever.

Because, as we established, your leverage doesn't impact your profit.

## 3. Using Leverage Like a Pro

To effectively use leverage, it's quite simple. You set your leverage around 2-5x as a baseline. When you're about to enter a trade, you calculate your SIZE based on how far the targets and stop are from entry. If it's a scalp trade and the targets/stops are going to be 0.5-2% away, then it might make sense to increase your size a lot, which means you might set your leverage to 10-20x depending on what’s needed.

The important thing is to keep your leverage low enough so that you always stop out before your liquidation level is reached. Then, for your trade, you always calculate your size so that when you stop out, you don't lose more than 5% of your account.

This was a lot of text, so here’s the TL;DR:

• Set leverage 2-5x.

• Adjust your position size, not leverage, when sizing into trades.

• If you don't get to the desired size on low leverage, up it to 10x 

• If you find yourself needing to go higher than 20x, you fucked up.

• Try to keep your position size down so that you don't lose more than 5% of your account on a single trade.

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