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5. Futures and leverage
Long, Short and notional value
A long has a positive gross result when a linear contract's price rises; a short when it falls. For a position of quantity q with entry price E and exit X: long P&L = q × (X - E); short P&L = q × (E - X). These formulas describe linear exposure with quantity in units of the base asset. Inverse contracts require the venue's formulas.
Notional N = q × E. With q = 2 and E = 100, the notional is 200. Simplified initial margin at leverage L is M ≈ N / L. A real terminal may account for Mark Price, fees, risk tiers and other parameters. Margin is collateral, not a predefined loss.
With the same quantity and the same price move, changing leverage does not multiply P&L by itself. It reduces or increases the required collateral and changes the distance to liquidation. If someone instead increases the notional while keeping the same margin, they also increase the result's sensitivity to price.
Isolated and cross margin
In isolated mode, collateral is allocated to a position under the venue's rules. However, automatic margin replenishment, if enabled, can use additional funds. Always check that setting and the rules for calculating obligations.
In cross mode, positions use shared available collateral. A profit in one position can support another, while a combined loss can threaten more of the account. Several small orders do not necessarily mean a small overall risk.
Maintenance margin is the minimum collateral needed to keep a position open. Breaching the requirement triggers liquidation. Liquidation is not the trader's Stop-Loss. Some crypto venues use Mark Price for liquidation, while the selected stop may follow Last Price.
| Example with q = 2, E = 100 | Leverage 2× | Leverage 10× |
|---|---|---|
| Notional | 200 | 200 |
| Simplified margin | 100 | 20 |
| Long: exit 98, gross P&L | -4 | -4 |
| Stop risk relative to margin | 4% | 20% |
The table does not calculate the liquidation price: leverage alone is insufficient. You also need maintenance-margin requirements, collateral, fees, the mode and the venue's rules.
Safe practice
Do not choose leverage first. First define the practice scenario, stop, money risk, permitted quantity and costs. Then assess the collateral and distance to liquidation. If the protective stop lies beyond liquidation or almost coincides with it, the plan fails the check.
Exercise. Notional 500, leverage 5×, stop 2% from entry. Simplified margin is 100; the planned gross loss is 10. Answering "risk 100" confuses collateral with the loss to the stop. The actual loss can nevertheless exceed 10 because of execution and costs.
Stop rule. Until you can explain the contract size, P&L formula, stop trigger source and liquidation mechanism, use a paper journal. This module does not require a trade in a futures account.