Leverage in futures trading allows you to control a larger position than your actual account balance by borrowing funds from the exchange. This amplifies both potential gains and potential losses, making leverage a powerful but risky tool. In this guide, we’ll cover the basics of leverage, how to set it up in 3Commas, and tips for managing risks effectively.
What Is Leverage in Futures Trading?
Leverage is a financial tool that enables traders to open larger positions than their account balance would otherwise allow. For example, using 10x leverage means that with $100 in your account, you can control a position worth $1,000. While leverage can increase potential profits, it also raises the risk of significant losses and can lead to liquidation if the market moves against your position.
Key Points:
Leverage amplifies both gains and losses.
Higher leverage increases risk and potential returns.
Exchanges have varying leverage limits depending on the asset.
How to Set Up Leverage on 3Commas
Step 1: Enable Futures Trading
Log in to your 3Commas account.
Ensure that your Futures Trading account is linked to your 3Commas account.
You can see which Futures exchanges we support here: Available Exchanges and Supported Features
Step 2: Select the Leverage Setting
Choose the trading pair (e.g., BTC/USDT) you want to trade.
Locate the Leverage Settings option (often represented by a slider or dropdown menu).
For DCA bots:
For SmartTrades:
For Grid bots:
For Signal bots:
For Terminal:
Choose your desired leverage level, based on your risk tolerance and strategy. Common leverage levels include:
Low Leverage (2x - 5x): Safer, allowing for smaller price fluctuations without liquidation.
Moderate Leverage (10x - 20x): Higher risk with more potential gain.
High Leverage (50x - 125x): Maximum potential gain but highest risk of liquidation.
Confirm your leverage settings and proceed with your trade setup.
Practical Example of Using Leverage
Let’s look at a simple example to understand how leverage affects a futures trade:
Account Balance: $100
Chosen Leverage: 10x
Effective Position Size: $1,000
If the asset price increases by 5%, the position value becomes $1,050, resulting in a $50 profit. Conversely, if the asset price decreases by 5%, the position value becomes $950, resulting in a $50 loss.
Important
With high leverage, even minor price changes can lead to significant gains or losses. Always use leverage cautiously, especially as you approach higher levels.
Tips for Managing Leverage and Reducing Risk
Leverage increases both the profit potential and the risk of your trades. Here are essential tips for using leverage safely:
Start with Lower Leverage:
Especially if you’re new to futures trading, consider starting with low leverage (e.g., 2x - 5x) to reduce risk.
Set a Stop-Loss Order:
A stop-loss order helps you limit potential losses by automatically closing your position if the market moves against you by a specified amount.
Example: If you’re using 10x leverage, a stop-loss order set at 2% below your entry price would help protect your account from excessive loss.
Use Take-Profit Orders:
Just as a stop-loss limits potential losses, a take-profit order locks in gains by closing your position once the price hits your target.
Monitor Margin Requirements:
Ensure you have enough funds in your account to meet margin requirements, especially if using higher leverage. Failure to meet margin requirements can lead to liquidation.
Calculate Your Liquidation Price:
Each leveraged position has a liquidation price where the exchange will automatically close your position to prevent further loss. Calculate your liquidation price before opening a position to understand how much price movement your trade can withstand.
Here are links on how to calculate the liquidation price for each exchange:
Risks of Using High Leverage
While leverage can amplify your profit potential, high leverage increases the likelihood of liquidation and may quickly exhaust your account balance. Here are some of the main risks associated with high leverage:
Increased Volatility Impact: With higher leverage, even small market movements can lead to large losses.
Liquidation Risk: High leverage increases the chance of hitting the liquidation price, leading to a total loss of the leveraged funds.
Funding Fees: Leverage positions may incur additional funding fees, especially if held over an extended period.