Initial Leverage vs. Effective Leverage
What is Initial Leverage?
Initial Leverage refers to the Leverage level you initially set when opening a position. This value remains constant unless you manually change it yourself.
What is Effective Leverage?
Effective Leverage represents the actual Leverage at any given moment, which can vary based on changes in your Position's Margin caused by Unrealised PNL.
Fluctuations in 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 reflects the profit or loss of your open position that has not been realised through closing the trade. When you have an Unrealised Loss, it deducts from your Position Margin, depleting it. In this case, your Effective Leverage will rise. Conversely, an Unrealised Profit adds to your Position Margin, leading to a decrease in Effective Leverage.
Example
1. You buy a position worth 100 dollars
2. You use 10x leverage, so your margin is 10 dollars.
3. At that time, your Effective Leverage is 100/10 = 10x (Effective Leverage = value/equity)
4. The Mark Price moves against the position, and you lose 5 dollars.
5. The position is worth 95, and your equity in the position loses 5 dollars, so your equity is 5 dollars.
6. Effective leverage is now 95/5 = 19x.
2. You use 10x leverage, so your margin is 10 dollars.
3. At that time, your Effective Leverage is 100/10 = 10x (Effective Leverage = value/equity)
4. The Mark Price moves against the position, and you lose 5 dollars.
5. The position is worth 95, and your equity in the position loses 5 dollars, so your equity is 5 dollars.
6. Effective leverage is now 95/5 = 19x.