Understanding Leverage in Isolated Margin
When using Isolated Margin, it's crucial to distinguish between Initial Leverage and Effective Leverage.
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Initial Leverage: This is the leverage you choose when you initially open a position. This setting remains fixed unless you manually adjust it.
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Effective Leverage: This represents the actual leverage at any given time, and it fluctuates based on changes in your position's margin due to Unrealised Profit and Loss (PNL)
How Unrealised PNL Affects Effective Leverage
The fluctuations in Effective Leverage are primarily influenced by your Unrealised PNL (Profit and Loss) and its impact on your Position Margin.
Your Unrealised PNL is the profit or loss on your open position that you haven't yet realised by closing the trade. When you have an Unrealised Loss, it reduces your Position Margin. This reduction increases your Effective Leverage, as you have less of your own capital supporting the position. Conversely, when you have an Unrealised Profit, it increases your Position Margin. This increase decreases your Effective Leverage, as you have more of your own capital supporting the position.
Example
- You open a position worth $100.
- You use 10x leverage, so your initial margin is $10.
- At this point, your Effective Leverage is $100 / $10 = 10x (Effective Leverage = Position Value / Position Margin).
- The Mark Price moves against your position, resulting in a $5 Unrealised Loss.
- Your position value becomes $95, and your Position Margin decreases by $5, leaving you with $5.
- Your Effective Leverage is now $95 / $5 = 19x.